Removing tax deductibility of non-compliant payments
A new measure, effective from 1 July 2019, will mean that you will only be able to claim deductions for payments you make to your workers (directors, employees or contractors) where you have complied with the pay as you go (PAYG) withholding and reporting obligations for that payment.
If the PAYG withholding rules require you to withhold an amount from a payment you make to a worker, you must:
- withhold the amount from the payment before you pay it, and
- report the amount to the ATO.
Any payments you make where you haven't withheld or reported the appropriate PAYG withholding are called non-compliant payments and you will not be able to claim an income tax deduction for these payments.
The payments that will be caught by this measure include:
- salary, wages, commissions, bonuses or allowances to an employee
- directors’ fees
- payments to a religious practitioner
- payments under a labour hire arrangement; and
- payments for a supply of services where the contractor has not provided you with their ABN.
Whilst the rules in relation to most of the payments above are well understood, payments of cash to suppliers who are not registered with the ATO and do not have an Australian Business Number (ABN) are likely to cause most concern. This includes payments to, for example, gardeners and cleaners where a tax deduction has been claimed but appropriate PAYG not withheld.
In some instances, the supplier may be in a position to provide a Statement by Supplier where they can provide you a written statement declaring that the supply relates to a hobby or private recreational pursuit, for example an artist providing the supply of artwork. The relevant form can be found here.
Failure to withhold or report
If you should have withheld PAYG tax from a payment but didn't, you will lose your deduction for that payment unless you make a voluntary disclosure to the ATO before they commence an audit or other compliance activity.
If you withhold PAYG tax from a payment but don't report the amount to the ATO (i.e. by lodging your Activity Statement), you will lose your deduction for the payment unless you make a voluntary disclosure to the ATO before they commence an audit or other compliance activity. Please contact your Ruddicks advisor if you need to make a voluntary disclosure and they will guide you through the process of completing a compliant disclosure.
The ATO may also impose penalties for failing to withhold an amount from a payment, or failing to report the amount.
Mistaking an employee for a contractor
It can be easy to make the mistake of incorrectly believing that an employee is genuinely acting as a contractor and as a consequence you fail to withhold PAYG tax from their payments as they have provided you with their ABN. In this instance, if you have made an honest mistake and not withheld PAYG tax from the payment to them, you will not lose your deduction for these payments because you complied with the withholding obligations for a contractor.
For this to apply, however, you must have complied with both of the following obligations:
- you obtained an invoice, or some other document relating to the payment that quoted the contractor's ABN; and
- you have no reasonable grounds to believe that it's not the contractor's ABN or that the ABN is not correct.
Important! Under these new rules, you will need to:
- Ensure that you withhold PAYG tax from payments identified above, including where such payments are made to related parties and family members;
- Ensure that you promptly lodge your Activity Statements to report these withholdings
Or risk losing a tax deduction for these payments and possibly incur penalties for non-compliance.
Please speak to your Ruddicks adviser as soon as possible if you or your entities make payments to individuals and you are not sure whether PAYG withholding rules would apply to these payments.
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The content of this newsletter is general in nature. It does not constitute specific advice and readers are encouraged to consult their Ruddicks adviser on any matters of interest. Ruddicks accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. This information is current as at 3 July 2019, and was published around that time. Ruddicks particularly accepts no obligation or responsibility for updating this publication for events, including changes to the law, the Australian Taxation Office’s interpretation of the law, or Government announcements arising after that time.
Any advice provided is not ‘financial product advice’ as defined by the Corporations Act. Ruddicks is not licensed to provide financial product advice and taxation is only one of the matters that you need to consider when making a decision on a financial product. You should consider seeking advice from an Australian Financial Services licensee before making any decisions in relation to a financial product. © Ruddicks 2019