Non-compliant payments to Workers no longer tax deductible
From 1 July 2019, a business will only be able to claim a tax deduction for payments to workers (employees or contractors) where the business has 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 made to a worker, you must:
- withhold the amount from the payment before it is paid; and
- report the amount to the ATO
Any payments you make to workers that do not comply with the above two requirements are called non-compliant payments.
You cannot claim a tax deduction for non-compliant payments.
It is important to note however, that if you make a mistake you won’t lose your tax deduction provided the mistake is corrected as soon as possible and the ATO is notified.
The following payments must comply with the PAYG Withholding and reporting obligations in order to be tax deductible:
- salary, wages, commissions, bonuses or allowances to an employee
- directors’ fees
- payments to a religious practitioner
- payments under a labour hire arrangement
- payments for a supply either wholly or partly for services where the contractor has not provided you with their Australian business number (ABN).
A non-cash benefit is something you provide instead of paying cash, for example goods or services.
If you provide a non-cash payment in any form except money, you will still be required to meet your withholding obligations in order for the payment to be classified as a compliant payment and therefore claim a tax deduction.
You are required to calculate the withholding amount as if the payment had been in the form of money. The withholding amount should then be remitted to the ATO.
You must withhold and remit the amount to the ATO before providing a non-cash payment. There is no requirement to withhold under PAYG withholding if the payment is a fringe benefit or a share or right under the employee share scheme.
Correcting a mistake
If you withhold an incorrect amount by mistake, or you withhold the correct amount but make a mistake when reporting it the ATO, you won’t lose your tax deduction.
To minimise any penalties, you should correct your mistake as soon as possible by lodging a voluntary disclosure in the approved form with the ATO.
If you should have withheld a PAYG amount from a payment but didn’t, you must voluntarily notify the ATO before the ATO advises you that they have commenced audit or other compliance activity. If you fail to do this, you will lose your tax deduction.
You can make a voluntary disclosure by reporting the amount to the ATO in your next Business Activity statement. Your activity statement should be lodged as soon as possible.
Mistaking an employee for a Contractor
There are instances where a business may mistake and treat a person working for them as a contractor when they are in fact an employee. Where the payments are mistakenly treated as payments to a contractor and an invoice with an ABN is supplied, the business would not withhold payments from the contractor.
In instances where you make a mistake such as this, you won’t lose your deduction for the payments if, at the time you believed the worker was a contractor, you 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.
You should correct your mistake by lodging a voluntary disclosure form with the ATO in the approved form.
If you don’t comply with your PAYG withholding and reporting obligations for a payment, you may:
- lose your deduction for that payment; and
- face existing penalties that apply for failure to withhold and report amounts under the PAYG withholding system.
If you would like to discuss your reporting obligations further or are concerned you have made an error, please contact our office. It is important that if a mistake is made that it is rectified as soon as possible and reported to the ATO in order to maintain the tax deductibility of your payments.
With the introduction of Single Touch payroll, the ATO are receiving real time data on wages payments and it will therefore become much easier for the ATO to identify non-compliance by employers.
Refer to our blog for further information in relation to your Single Touch payroll obligations.
Still have questions?
Please contact our office on 07 3831 1055 to discuss how we can assist you further.
DISCLAIMER: The information on this website and the links provided are for general information only and should not be taken as constituting professional advice from Hall Browns Accountants. You should consider seeking the appropriate legal, financial, or taxation advice to check how the website information relates to your unique circumstances.