New measures targeting the “black economy” will deny businesses a tax deduction for payments to workers if businesses do not comply with their pay as you go (PAYG) withholding obligations.
Under the rules, deductions will be denied for payments to employees or contractors where either no amount has been withheld at all, or the withheld amounts are not reported to the ATO. For businesses who are doing the right thing, the measures include safeguards for those who make an error while attempting to comply with their withholding obligations. For example, withholding an incorrect amount, or reporting an incorrect amount to the ATO, will not affect a business’s entitlement to a deduction.
There are also two exemptions that allow taxpayers to deduct payments that would otherwise be denied under the new rules. The first exemption applies if a business voluntarily notifies the ATO of its failure to withhold or report an amount. However, the exemption only applies if the voluntary disclosure is made before the ATO commences any audit or other compliance activity for the relevant period.
The second exemption applies to employers that make payments to an employee they honestly believe to be a contractor and, as a result, fail to comply with their withholding obligations. Deductions for the payments will not be denied in these circumstances. Although these rules are primarily targeted at those operating in the black economy, businesses should not underestimate the impact of the new measures.
For example, businesses that make irregular payments, such as bonuses, commissions or allowances, may be at risk where their systems do not appropriately identify the payments as subject to withholding. Similarly, businesses that make payments to employees that are below the PAYG withholding thresholds may not be aware that a small increase in the payments could trigger a withholding requirement.
To ensure they are not denied deductions under this new measure, businesses should consider reviewing their systems and procedures before 1 July 2019 to ensure they are compliant with their PAYG withholding obligations.