What are the changes coming into effect?
If your business pays any of the following listed, you could deduct the expense before 1 July 2019:
- Salary, wages, commissions, bonuses or allowances to an employee
- Directors’ fees
- Labour hire agreement
- Supply of services – not including goods and real property – where the payment recipient has not provided its ABN.
Under the new legislation, if PAYG withholding rules require that you withhold part of the payment to a worker, you are required to:
- Withhold the amount from the payment before you pay it
- Report that amount to the ATO.
Any payments your business makes where you have not withheld or reported PAYG are considered non-compliant payments. If you don’t withhold or report PAYG tax, you won’t be able to claim a deduction for tax purposes. If you happen to make a mistake by withholding or reporting an incorrect amount, you won’t lose the deduction.
What about non-cash benefits?
A non-cash benefit is defined as something that is provided instead of paying cash. For example, goods or services in place of cash. In this situation, you will still need to report the PAYG tax to the ATO in order for it to be considered as a compliant payment that you can deduct from your revenue for tax purposes.
What if you make a mistake?
If a business withholds an incorrect amount by mistake, it won’t lose the deduction. In order to minimise penalties, the business can lodge a voluntary disclosure. In the case where the correct amount was withheld but a mistake was made when reporting it, the business won’t lose the deduction and should correct the mistake as soon as possible.
What happens if you fail to withhold or report PAYG tax?
If a business should have withheld PAYG but didn’t, it will lose the deduction for that payment, unless it voluntarily informs the ATO before it has started an audit or other compliance-related activity. This can be done by making a voluntary disclosure to the ATO.
In the case where you held PAYG tax from a payment but didn’t report the amount to the ATO, your business will lose the deduction unless you report the amount to the ATO before it starts an audit or other compliance activity. If your business hasn’t lodged its activity statement by the required timeframe, you should do so as soon as possible.
The ATO might also charge your business penalties if it has failed to withhold the PAYG amount from a payment or it fails to report it to the ATO.
What happens when you mistake an employee for a contractor?
It can be easy to make the mistake of incorrectly believing that an employee is acting as a contractor and not withholding PAYG tax from the payments you make to them. If you honestly make this mistake, you won’t lose your deduction for these payments because you were in compliance with the withholding obligations for a contractor.
The ATO provides criteria to determine whether a person you pay is an employee or a contractor.