From 1 July 2019, employers can only claim tax deductions for payments to workers (employees or contractors) where they have complied with the Pay As You Go (PAYG) withholding and reporting obligations for that payment. This policy ensures employers act as responsible “bas agents” by fulfilling their PAYG obligations before claiming tax deductions for worker payments.
If the PAYG withholding rules require you to withhold an amount from a payment you make to a worker, you must:
- withhold the correct amount from the payment before you pay it to them, and
- report the amount to the ATO.
This includes wages paid to yourself – where you are self-employed (including as a director or trustee).
Any payments you make to a worker where you haven’t withheld or reported the correct PAYG amounts are called “non-compliant payments”.
From 1 July 2019, you can NOT claim a tax deduction for “non-compliant payments”.
Employees
You won’t lose your tax deduction if you mistake, withhold, or report an incorrect amount. However, you must correct your mistake as soon as possible to minimise the penalties by lodging a voluntary disclosure on an ATO form.
Suppose you fail to withhold any PAYG from a payment that should have had a withholding tax withheld. In that case, you will lose your tax deduction for that payment unless you voluntarily advise the ATO before they commence audit activity.
Contractors
You will not lose a tax deduction for payments to contractors if:
- you have received an invoice which quotes the supplier ABN, and
- you have reasonable grounds to believe the ABN is correct.
There may be a situation where you make a mistake and treat the worker as a contractor when they should be an employee. You will not lose a tax deduction if, at the time of payment, you thought they were a contractor, and
- you have received an invoice which quotes their ABN, and
- you have reasonable grounds to believe the ABN is correct.
If you have made a mistake and the contractor should be an employee, you can correct your mistake by lodging a voluntary disclosure on an ATO form.
If you are in any doubt about whether the contractor should be an employee or the correct PAYG withholding, please contact us.
Kreston Stanley Williamson Team
*Correct as of September 2019
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
