An extra layer of complexity is added for small businesses as new measures to tighten grip on the black economy targets withholding obligations and tax deduction.
The Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018 was passed by the Senate on 15 November 2018 and awaits Royal Assent. The bill amends the Income Tax Assessment Act 1997 (“ITAA”) to disallow income tax deduction for certain payments if the associated withholding obligations have not been complied with. The new law will take effect from the date the bill receives Royal Assent.
The new legislation may add to the administrative burden placed on small business owners but is, nonetheless, consistent with the existing law which requires employers and entities to ensure amounts are withheld on certain payments to employees and contractors.
Employers and entities who do not comply with their withholding obligations will now be denied a tax deduction for payments where the obligations have not been met.
Businesses are encouraged to take the opportunity to review the payments made to employees and contractors to ensure withholding obligations are being met and the business is not at risk of being denied tax deductions for essential business payments.
So what payments does the new law apply to?
We detail the payments that may be impacted (and under what circumstances) below:
- Salary, wages, commissions, bonuses or allowances to an employee
- Director's fees
- Payments to a religious practitioner
- Payments under a labour hire arrangement, or
- Payments for a supply of services – excluding the supply of goods and supplies of real property – where the payee has not quoted its ABN, if
- The PAYG withholding regime applied to the payment
- The payer was required to withhold an amount, and
- The payer did not withhold an amount from the payment or did not notify the commissioner when required.
Reporting requirements – the impact of single touch payroll
Single touch payroll (STP) came into effect for businesses with 19 or more employees from 1 July 2018 and a proposal seeks to extend this to businesses with less than 19 employees from 1 July 2019.
The STP system requires same day reporting for wages, director’s fees and payments to religious practitioners, meaning that businesses need to ensure regular reviews for compliance on an ongoing basis.
Privately owned businesses that may have historically waited until year-end to classify payments to directors as director’s fees or bonuses are encouraged to review the withholding requirements when the payments are made to ensure compliance both with withholding obligations and STP reporting requirements.
Payments to contractors – contractor or employee?
Businesses who engage workers on a contract basis are also strongly encouraged to review the basis on which these workers are engaged. There are many factors that need to be taken into consideration when determining if a worker is a contractor or an employee. The mere fact that the worker provides an ABN and an invoice will not extinguish any obligations under the law in respect of employee entitlements (including PAYG withholding, compulsory superannuation guarantee, leave entitlements, workers compensation etc).
If the commissioner determines a contractor is an employee and payments have been incorrectly classified, the employer will not only be at risk for unpaid PAYG withholding and compulsory superannuation guarantee payments, the employer will also be at risk of being denied a tax deduction for such payments if the withholding obligations are not complied with.
Exceptions to the new law
There are some exceptions under the new law which will provide some comfort. If a business becomes aware of withholding obligations that it has not met and makes voluntary disclosure to the commissioner in the approved form, a tax deduction will be allowed for payments that would otherwise have been denied. We note this exception is only available where the notification is made before the commissioner commences an audit or other compliance activity.
The new law also does not apply to payments where a business is not required to withhold, for example where a contractor is not required to provide an ABN.
Practically, this exception may have limited application for many businesses.
The best way to mitigate any risk of non-compliance is to review all payments that may be impacted.
Should you find PAYG withholding obligations that have not been met, we recommend making a voluntary disclosure to the commissioner. It is also imperative to engage with the Australian Taxation Office (ATO) to ensure outstanding payments are made or where necessary, payment arrangements are established.
Businesses with less than 19 employees should make early arrangements to ensure their accounting systems comply with STP reporting requirements from 1 July 2019. This may pose a challenge for micro businesses with only 1-5 employees and historically used to processing payroll transactions manually each pay period.
We understand the ATO is aware of the challenges STP may pose to these businesses and is currently working towards developing a more workable alternative, so watch this space for updates.
For more information on withholding obligations
If you require assistance in reviewing your withholding obligations, please contact your local RSM office.