The Taxman is coming – IMPORTANT
LAW CHANGES THAT CAN DENY DEDUCTIONS FOR WAGES AND SUBCONTRACTOR PAYMENTS
- Fail to withhold the right amount of PAYG Withholding; or
- Fail to report the PAYG Withholding to the ATO
- Fail to meet payment deadlines for remittance of PAYG Withholding to the ATO
This is particularly relevant in situations where:
- You are not registered for Single Touch Payroll and are required to be, so are not reporting wages correctly to the ATO. All businesses with unrelated employees must be registered for Single Touch Payroll by 30 September. Holmans recommend that even where all employees are related/members of your family, you should still register for Single Touch Payroll as it will soon apply to everyone.
- Casual employee payments where you don’t get a TFN declaration completed. This often occurs in transient workforces like hospitality or accommodation.
- Fail to withhold the correct amount of PAYG under the PAYG Withholding tables… or just fail to pay the PAYG Withholding to the ATO.
- Payments to contractors where you haven’t verified their ABN. It is a common misconception, but the obligation is actually on the payer to verify the ABN is valid before payment. If it is not, you are meant to withhold 45% of the payment and report it on your BAS.
- Cash wages to short term employees such as cleaners, junior staff, wait staff so-on.
Thankfully, honest mistakes can be corrected if you voluntarily notify the ATO. However, it is up to you to voluntarily disclose the error (& have the procedures to locate it in the first place) and the disclosure must be done in the approved format.
Update your procedures now: Business procedures need to be updated to ensure you have the greatest chance of complying with the new rules. Holmans recommend the following:
- No Tax File Number declaration, No employee superannuation fund… equals no payment from you. No exceptions. Do not pay employees until they have returned all the necessary documentation. Ensure your business has complete and correct “on boarding” new employee procedures.
You may wish to review here for some useful guides
- Your business should have procedures to verify the ABN of all contractors and suppliers. You should store proof that you have checked their ABN on their supplier file. Many online accounting software packages verify ABNs for you, but if not, you can check here https://abr.business.gov.au/. Importantly, you should verify that the ABN lines up exactly with the name of the person you are paying. In the building industry it has been quite common for contractors to quote the ABN of Bunnings on their sales invoices. While a valid ABN, it is obviously the incorrect ABN for the contractor payment and in this situation you would be required to withhold 45%.
- Regularly (we recommend quarterly), review your payments and employee files to ensure you have complied with the above rules for all new employees/suppliers.
- Ensure payment arrangements are negotiated with the ATO for any PAYGW/BAS liabilities prior to the debt becoming overdue. More information can be found by clicking here.
Late payment of employee superannuation continues to be non-deductible for tax purposes. The superannuation must be receipted in the employee super fund on or before the due date. It is therefore important to note, that payment should be made prior to the quarterly due dates to ensure deductibility.
It doesn’t matter that you eventually make up any shortfall, the tax deduction will be lost forever, and there are additional requirements to notify the ATO via approved forms which impose penalties and interest. Superannuation should never be paid late. Holmans recommend employee superannuation is paid monthly to ensure smoother cashflow and less chance of late payment. Holmans expect a significant increase in ATO audit activity in relation to employee superannuation and compliance this year.
Further, the ATO now have the ability to penalise you personally (via a Director Penalty Notice) by transferring the BAS/Super debts from your entities to you personally. This of course means you will become personally liable for the debt, and it could be recovered by the ATO in extreme cases via bankruptcy/asset disposals.
Important Division 7A changes mean extra tax burden
The ATO have announced some important proposed changes to Division 7A loan (related party company loans).
As you are probably aware, Division 7A is the ATO terminology for a loan from your company to related parties (i.e. family members or trusts). Essentially, Division 7A represents money taken or loaned to other entities from a company, for which you haven’t paid individual tax on yet. These loan arrangements are very common in family groups and are a simple and effective method of delaying tax. Information about these loans is included in our letters to you each year.
Importantly, the Government/ATO have proposed some significant changes to the management of Division 7A loans, which are forecast to apply from 1 July 2020 (next year), including:
- Changing the term of all Division 7A loans to 10 years (most loans are currently on a 7 year term, but some maybe on 25 years), including any current loans (no grandfathering).
- Increasing the interest rate from a “home loan” style rate (currently 5.2%) to an “overdraft” style rate (forecast to be approx. 8.3%)
There are some important consequences to these changes. While the minimum yearly repayment may actually get less per year, the overall repayments will increase due to the term and significant rise in the interest rate. Accordingly, we believe for every $100,000 of Division 7A loans you have, the overall impact on these changes will be an extra $15,500 to $17,500 (approx.) in tax (assuming you are on the highest marginal tax rate).
The actual tax impact will vary based on your individual circumstances, including your individual tax rate, how the transition rules impact you, how far along your current Division 7A loans are, your forecast taxable income into the future, your group structure and whether the interest is deductible to you or any of your entities.
These changes are only draft at this stage, but need to be reviewed/considered as part of your yearly tax planning. If you have Division 7A Loans, we strongly recommend you complete Tax Planning in the current tax year (March to June 2020). Single Touch Payroll (STP) has also changed the rules, making it harder to pay directors fees in retrospect (fail the withholding rule requirements above) which assists with the management of these loans. Accordingly, planning is the key.
If your loans are substantial, or you feel they are becoming unmanageable, you may wish to discuss the impact of these changes and strategies now.
ATO auditing individual deductions
Media outlets are reporting that hundreds of thousands of Aussies are expected to receive “please explain” letters this year amid a dramatic escalation in the ATO’s crackdown on the $8.7 billion “tax gap”.
“Dodgy” work-related claims like dry cleaning, laundry/uniform and car expenses will once again be the most closely scrutinised, along with investment property deductions and earnings from cryptocurrencies and sharing economy platforms like Uber / AirBNB.
The ATO has also been given additional resourcing by the Government to “close the gap”. As a result, Holmans think we will see far more individual audits and ATO letters seeking additional information this year.
The ATO now use sophisticated techniques to identify problem areas, including cross-matching information (for example, AirBNB/Uber share their records with the ATO), industry and occupation benchmarking, foreign income details shared by overseas Governments, social media reviews and lifestyle and asset matching (such as property, boats, luxury cars and overseas travel – assets/lifestyle vs income). In addition, new requirements mean the ATO get a very specific description of each and every one of your claims in a tax return (not just category totals like in the past).
Importantly, you need to be able to substantiate your expenses, either an invoice/receipt or proof of payment on a bank statement (must be obvious what for). In addition, the expense must not be reimbursed by your employer. If you can’t substantiate the expense, the deduction will be denied, even if it is considered a normal expense of your occupation.
Be wary of common misconceptions about what is claimable. The ATO publish occupation guides on what is and isn’t allowable can be found here.
It is also important to remember, a tax deduction only ever gets you back on average about $22 to $39 in tax refund for every $100 you spend. So you always go backwards overall in cashflow. Is it worth the claim and scrutiny if you are pushing the boundaries or don’t have the supporting receipt?
In fact, initial reports by the ATO suggest that many taxpayers are already claiming less in anticipation of possible scrutiny this year.
Whether valid or not, high deduction claims are likely to be put you on a short list for possible review by the ATO. If you do have high expense claims, make sure you have supporting documentation and consider whether audit insurance (which covers our cost of dealing with the ATO on your behalf) is appropriate.