Will your business be denied this tax deduction?
Non-compliance with the new PAYG Withholding rules could cost your business thousands in income tax.
Are you a business owner with employees or contractors? You need to be aware that new PAYG withholding rules are now in place to deny tax deductions for salary and wages where PAYG is not withheld and not reported to the ATO.
What’s caused the change in the law? The government discovered that some businesses have been claiming a tax deduction for payments that require PAYG withholding but have not actually withheld any PAYG amounts or reported the amounts to the ATO.
From 1 July 2019, if your business does not fully comply with the new PAYG withholding obligations, you may not be entitled to claim a tax deduction for wage and salary payments.
Which payments are affected by the new rules?
From 1 July 2019, if you are a business that makes payments for work and services which are subject to PAYG withholding, you must ensure that PAYG withholding is correctly reported in respect of the following payment types:
• Payments to employees of salary, wages, commission, bonuses or allowances
• Payments of director fees
• Payments to individuals under labour hire arrangements
• Payments for Personal Services,
• Payments to religious practitioners
• Payments for work and services where the supplier has not quoted their ABN
If you fail to withhold and report PAYG Withholding from these payments for work and services, you can expect:
• Your business being denied an entitlement to claim a tax deduction for any of the above payments; and
• Possible ATO audit activity
Do these new rules apply to non-cash benefits?
Yes. A non-cash benefit provided as a payment for work and services is also subject to the new rules, where such non-cash benefits would normally be subject to PAYG withholding and would not be specifically exempted from PAYG withholding (such as a fringe benefit or an exempt benefit for FBT purposes).
What if I make a mistake with payroll processing or BAS reporting?
You should make note that a tax deduction for wage and salary will only be denied where no amount of PAYG has been withheld at all or no notification is made to the ATO – such as failure to report the amounts in your Activity Statement.
If you happen to withhold an incorrect amount but notify the ATO of your error, then you can expect to retain your entitlement to a tax deduction. Withholding an incorrect amount will not affect your ability to claim a deduction so long as you have taken steps to correct the error.
What if my business is not required to withhold PAYG on certain payments?
There may be circumstances where you’re not required to withhold a PAYG amount from a payment for work or services. For example, where you pay an employee whose weekly, fortnightly or monthly salary is less than the tax-free threshold.
What can trigger an ATO audit?
You may be at risk of an ATO audit or review where:
• You don’t lodge your Activity Statements on time; or
• You don’t lodge your payroll each week using Single Touch Payroll (STP); or
• You don’t correctly withhold a tax amount from a payment before you pay it to an employee or a contractor.
If you are selected for an ATO audit on this matter, we strongly recommend that voluntarily notify the ATO, in the appropriate form, of your mistake prior to the commencement of any audit or compliance activity.
Are payments to ABN holders and contractors affected?
If you are a business that has been quoted an ABN by a contractor, you will generally be able to claim a tax deduction for payments made to the contractor.
However, a situation can arise where an employer makes a payment to a contractor with a valid ABN, but later discovers that the contractor is a common law employee. Broadly speaking, a deduction won’t be denied provided the ‘employer’ would not have been required to withhold on the assumption that the individual is a contractor.
The distinction between a contractor and a common law employee can often be complex. We recommend that you seek professional advice on this matter if you have any concerns.
Do any other penalties apply for PAYG withholding non-compliance?
Yes. Not only do you risk denial of a deduction for salary and wage payments, you are also exposed to the existing penalties for failure to correctly withhold. Company Directors have a legal responsibility to ensure that their company is meeting its PAYG withholding obligations. Failure to meet these obligations can result in a personal liability for unpaid amounts.
The key takeaway here is that a tax deduction will only be denied to a business where no amount has been withheld on the payment, or the ATO is not notified of the withheld amount (via STP or the Activity Statement). The withholding of an incorrect amount does not automatically deny you a tax deduction for the payment.
We recommend that you have measures in place to ensure that you are correctly reporting your PAYG withholding obligations to the ATO.
The approved methods of reporting include Single Touch Payroll (STP) and reporting on the Activity Statement.
The importance of accurate bookkeeping, payroll processing and timely lodgement of Activity Statements has never been more crucial.
If you’re a business with concerns about meeting your tax obligations as an employer, or you’d like assistance with bookkeeping, payroll processing or accounting software advice and training, please get in touch with us on (03) 9746 6479 to find out how we can help you.