By Lucy Suthern
Businesses can be denied a tax deduction for payments made to employees and contractors if they do not follow the rules.
New legislation has been introduced effective from 1 July 2019 to deny employers a tax deduction for payments made to employees and contractors if the associated PAYG withholding rules have not been complied with. This legislation was introduced to create a financial disincentive to businesses who fail to follow the rules by disallowing deductions otherwise available to them. Failure to comply with the withholding and reporting obligations opens the door for non-reporting or under-reporting of income by their employees and contractors.
From 1 July 2019, a business cannot deduct a payment to an employee or contractor if:
The ATO makes it clear that transactions made using cash are legal and deductible. However, the aim of this measure is to encourage complying payments to employees and contractors by disallowing deductions where cash is deliberately used to avoid PAYG withholding and super obligations.
Employers who fail to withhold and report amounts under the PAYG withholding system may also be issued with a penalty notice for failure to comply with their PAYG withholding obligations.
Employers who mistakenly classify an employee as a contractor due to the worker providing an ABN will still be able to claim a deduction and there are exceptions that operate in certain situations when the employer is not at fault.
Please contact your WDF Professional team if you would like further information on these new measures.