From 1 July 2019, businesses will only be able to claim an income tax deductions for payments that are made to workers (employees or contractors) when the employer has complied with the pay-as-you-go (PAYG) withholding and other tax reporting obligations for that payment.
If the PAYG withholding rules require you to withhold an amount from a payment you must:
Note however that if the employer makes a mistake and withholds or reports an incorrect amount, they will generally not lose their deduction — as long as the ATO is notified and a correction is made.
Type of payments affected includes:
A non-cash benefit is something that is provided instead of paying cash – for example goods or services. In this case, a business still needs to report to the ATO in order for this to be classified as a compliant payment and therefore allow the employer to claim an income tax deduction.
The amount that you are required to withhold and send to the ATO is the amount you would have been required to withhold if the payment had been in the form of legal tender. You will need to use the relevant withholding tables.
Mistaking an employee for a contractor
There may be a situation where a business genuinely believes their employee is acting as a contractor, and so believes they are not obliged to withhold PAYG tax from payments as the “contractor” has provided their ABN.
In this instance, the deduction won’t be lost if, at the time you thought they were a contractor, the business complied with both of the following obligations:
TIP: It is always good business practice to check the ABN on the invoice and to check that the contractor is registered for GST if they have charged GST.
If you don’t comply with your PAYG withholding and reporting obligations for a payment, you may:
Paul Griffiths CA CTA
Paul Griffiths is a Chartered Accountant with over 20 years assisting Australian Small Businesses with income tax, succession and tax planning matters.