Removing the Tax Deduction for “Non-Compliant” Payments

Wayne StaalSmall Business

Removing the Tax Deduction for “Non-Compliant” Payments

Starting 1 July 2019, employers will only be able to claim a deduction for payments to employees or contractors if they have complied with the new Pay As You Go (PAYG) withholding and reporting obligations in relation to those payments.

Essentially, this means you will need to withhold the correct amount, as well as report it to the ATO to be able to claim a tax deduction.

The most common situations where this is likely to impact your business are as follows:

  • Ensuring all contractors and labour hire arrangements have a valid ABN by comparing it to the ABR Website or using your in-house software functionality. If they do not have an ABN, it is invalid or not theirs, you are meant to withholding 45% of the payment and report it to the ATO. Failure to do so, means you won’t be able to claim a tax deduction for the payment. This will be particularly important in industries that use Taxable Payments Annual Reporting (TPAR) systems such as building and construction, cleaning, information technology consultants and couriers/drivers.
  • Employee payments. Care must be taken to ensure you comply with the PAYG withholding and reporting rules, particularly Single Touch Payroll (STP). This includes payments such as:
  • Salary, wages, commissions, bonuses or allowances to employees
  • Director’s fees
  • Non-cash payments (e.g. You gave a car as payment for services provided)

Find out more about non-compliant payments here.

What happens if I make a mistake?

You will not lose your deduction, as long as you:

  • Withheld the wrong amount – you can lodge a voluntary disclosure in the approved form.
  • Withheld the right amount but made a mistake reporting it – correct the mistake as soon as possible.

As long as you let the ATO know the mistakes before the ATO conduct an audit or compliance activity regarding your tax affairs, you will still be eligible for a deduction. However, you may incur penalties and interest.

Now is a great time to check that your PAYG withholding procedures comply with the new laws effective from 1 July 2019. We recommend having an internal process for checking and validating all supplier/contractor ABNs and recording that supporting information on file (ABR Website printout stored on supplier file).

If you inadvertently make a mistake, taking early action to correct and disclose PAYG withholding will make a big difference to whether your business can still claim deductions. Accordingly, we recommend disclosing any mistakes post 1 July as soon as practically possible to ensure your cashflow and deductions are not adversely affected.

If you are unsure of your obligations give Holmans a call to discuss on (07) 5430 7600 or send us an email.