Combating the black economy has been a key priority of the government in recent years. To reduce business activity that takes place “under the radar” of the tax system, new laws commencing 1 July 2019 will prevent businesses from claiming deductions for payments to employees and certain contractors if they fail to comply with their pay-as-you-go (PAYG) withholding and reporting obligations.
Payments that must comply
Under the new laws you can only claim a deduction for the following payments if you comply with the PAYG withholding rules:
- Salary, wages, commissions, bonuses or allowances to employees;
- Directors’ fees;
- Religious practitioner salaries;
- Payments under a labour hire arrangement;
- Payments for a supply of services (except from supplies of goods and real property) where the contractor has not provided you with their ABN.
Non-cash benefits
A non-cash benefit is something you provide (for example goods or services) instead of paying cash. Businesses must pay a withholding amount to the ATO before making a non-cash payment (equal to the amount they would be required to withhold if the payment were money, calculated on the market value of the benefit). Under the new laws, businesses will not be allowed to claim a deduction for the non-cash payment if they do not comply with the withholding and reporting rules.
Payments to contractors
There are some situations that have been specifically excluded from the new rules, including the following:
| No ABN for contracts relating to goods & property | Businesses are generally required to withhold PAYG from a payment to a contractor where the contractor does not provide their ABN (known as the “no ABN withholding” rules). However, a business that fails to comply with these rules will only be denied a deduction if the payment relates to a contract for the supply of services. Contracts for goods and real property are excluded from the operation of the new laws. |
| Mistaking an employee for a contractor | There may be a situation where you genuinely believe a person is classified as a contractor (even though they are a deemed employee) and you don’t withhold PAYG tax from their payments as they have provided you with their ABN. In this instance, although you have made a mistake and not withheld PAYG tax from payments you made to your employee, you won’t lose your deduction for these payments because you complied with the withholding obligations for a contractor. See our July 2018 newsletter for more information on classification of contractor as an employee. |
Correcting a mistake
If you make a mistake by failing to withhold and report an amount, you will not lose your deduction if you voluntarily disclose this to the ATO before they commence an audit or other compliance activity in relation to your tax affairs. However, you may still incur penalties for failure to withhold and report PAYG depending on your specific circumstance.
Penalties
If you don’t comply with your PAYG withholding and reporting obligations for eligible payment and you do not voluntarily disclose your mistake to the ATO you:
- Will lose your deduction for that payment; and
- May face existing penalties that apply for failure to withhold and report amounts under the PAYG withholding system.
Staying Compliant
Below are some tips on how to ensure you stay compliant with your PAYG withholding responsibilities.
| Payments to | Things to do |
| Employees |
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| Contractors |
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| Other |
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Taking early action to correct and disclose PAYG withholding mistakes will make a significant difference to whether your business remains eligible for deductions, so make sure your PAYG withholding affairs are in order now.
Catalyst Financial can assist you with the process of detecting, correcting and disclosing to the ATO any mistakes that may arise.
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