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No Deductions to Non-Compliant Payments

From the 2019–20 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 that apply to that payment. These payments are ordinarily deductible under the general deduction provision.

New legislation denying a deduction for ‘non-compliant payments’ was introduced by Schedule 1 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Act 2018 (the Act), which received Royal Assent on 29 November 2018. This legislative change implements recommendation 7.5 of the Black Economy Taskforce Final Report, and was intended to create a disincentive to businesses making payments to workers operating in the Black Economy.

A Summary of the PAYG Withholding Rules

Under the PAYG withholding system entities must withhold an amount from certain payments for work and services.

These relevantly include a payment:

  • of salary, wages, commissions, bonuses or allowances to an employee;
  • of directors’ fees;
  • to a religious practitioner;
  • under a labour hire arrangement; and
  • for a supply of services where the payee (i.e. a contractor, or an interposed entity) has not quoted its ABN.

Division 14 of Schedule 1 to the Taxation Administration Act 1953 (TAA) requires an entity to withhold from the provision of non-cash benefits in circumstances where an amount of withholding under subdivision 12 would have resulted if such a payment had been a payment of money.

A payer must pay an amount — calculated based on the market value of the benefit — to the Commissioner before providing the non-cash benefit.

Division 14 does not apply to the provision of fringe benefits, exempt fringe benefits and employee share schemes.

The ‘no ABN withholding’ rules require an entity to withhold, at the top marginal rate, from payments made to another entity where the other entity does not quote an ABN. Exceptions apply.

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. To access this information, visit www.ato.gov.au.

Entities that are required to withhold must:

  • pay the withheld amount to the Commissioner; and
  • notify the Commissioner (including if the amount withheld is a nil amount).

For payments to employees and contractors, the amount required to be withheld must be withheld at the time of making the payment. An entity that is obliged to withhold an amount is required to pay that amount to the Commissioner. An entity that fails to pay PAYG withholding to the Commissioner by the time required will be liable to pay the general interest charge (GIC).

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.

New Rules for Non-Compliant Payments

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.

Not all withholding payments fall under the new rules. Only the following payments are affected:

  • a payment:
    • of salary, wages, commissions, bonuses or allowances to an employee;
    • of directors’ fees;
    • to a religious practitioner;
    • under a labour hire arrangement; or
    • for a supply of services — excluding supplies of goods and supplies of real property — where the payee (i.e. a contractor, or an interposed entity) has not quoted its ABN; and
  • a non-cash benefit provided in lieu of a cash payment.

There are three statutory exceptions to the non-deductibility rule.

Where the withholding amount is a nil amount.

A deduction is not denied if the amount required to be withheld — or the amount required to be paid to the Commissioner — is a nil amount.

Where an ABN is quoted by a misclassified employee.

An employer that makes a payment or provides a non-cash benefit to an employee they believe to be a contractor is not denied a deduction if — had the employer been correct in characterising the employee as a contractor — the employer would not have been required to withhold (assuming the worker quoted their ABN).

If the misclassified worker did not quote an ABN and the employer failed to withhold, the deduction is denied.

Where the employer makes a voluntary notification.

A deduction that would otherwise be denied is restored — in the original income year — if the employer voluntarily notifies the Commissioner of their mistake before the Commissioner tells the entity that an examination is to be made of its affairs relating to a taxation law.

The information provided above is a brief outline only and more detailed information can be found at www.ato.gov.au. MPAQ recommends you speak to your accountant about these changes.

Article source: www.taxbanter.com.au/banter-blog/non-compliant-payments/

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