From the 2020 income year, a business taxpayer cannot claim a tax deduction for a payment that it makes to a worker — whether an employee or a contractor — unless it has complied with all Pay As You Go (PAYG) withholding obligations. Deductions for non-compliant payments is intended to create discouragement to businesses making payments to workers operating in the black economy.
Under the PAYG withholding system, entities must withhold an amount from certain payments for work and services.
The following payments are subject to the PAYG withholding requirements
- Salary, Wages, Commissions, Bonuses or allowances to an employee.
- Directors’ fees
- Labour hire arrangements
- Supply of services where the payee has not quoted an ABN
The no ABN withholding rules require an entity to withhold, at the top marginal rate (47 per cent including the Medicare levy), from payments made to another entity where the other entity does not quote an ABN.
A ‘non-compliant payment’ is a payment to which the PAYG withholding regime applied, and the payer did not:
- withhold the amount from the payment as required; or
- notify the Commissioner when required:
- for payments — under the PAYG withholding or the STP provisions (as applicable); and
- for non-cash benefits — under the PAYG withholding provisions.
- Withholding an incorrect amount — and/or notifying an incorrect amount — will not affect the entitlement to a deduction.
- No deduction will be denied if the business fails to pay (i.e. remit) withheld amounts (although other penalties apply, such as GIC). The non-deductibility arises from the failure to withhold from the payment as required.
-No deduction will be denied if the business fails to report payments on a Taxable payments annual report (TPAR) or a PSAR. The non-deductibility arises from the failure to notify the Commissioner of withholding amounts via activity statements and/or STP.
There are a number of exceptions, namely where:
- the supply is wholly input taxed;
- the GST-exclusive amount of the payment does not exceed $75;
- the supply is made in the course or furtherance of an activity as a member of a local governing authority;
- the payment is not made in the course or furtherance of an enterprise;
- the payment is subject to rules relating to certain investments and TFN quotations;
- the payment is made to an individual who has provided a written statement to the effect that the supply was made in relation to a private recreational pursuit or hobby, or the supply is wholly of a private or domestic nature
The ATO has published a range of tax tables to help employers work out how much to withhold from employees and other payees. The ATO has also provided tax withheld calculators.
For most employers, certain withholding payments — including salary and wages paid to employees — must also be reported to the ATO electronically at the time that the payment is made, under Single Touch Payroll (STP).
Penalties apply for not complying with the PAYG withholding obligations. Broadly, where a business fails to withhold a PAYG or no-ABN withholding amount, the penalty is equal to the amount that should have been withheld. There are also penalties for failing to lodge the required information under STP or through the required reports.
The latest measure which denies a tax deduction for non-compliant payments is an additional punitive measure to encourage taxpayers to comply with their withholding and reporting obligations.
If you have any questions please contact us.
Melbourne Tax Advisory
1300 942 230
48 Bertie Street, Port Melbourne
42 Villiers Street, North Melbourne