Removing tax deductibility of non-compliant payments
From 1 July 2019, you can only claim deductions for payments you make to your workers (employees or contractors) where you have complied with the pay as you go (PAYG) withholding and reporting obligations for that payment.
If the PAYG withholding rules require you to withhold an amount from a payment you make to a worker, you must:
- withhold the amount from the payment before you pay it
- report the amount to the ATO.
Any payments you make where you haven’t withheld or reported the PAYG tax are called non-compliant payments. You won’t be able to claim a deduction if you don’t withhold any PAYG tax or report the PAYG tax to the ATO. If you make a mistake and withhold or report an incorrect amount, you will not lose your deduction.
Payments that must comply
You can only claim a deduction for the following payments if you comply with the PAYG withholding rules:
- of salary, wages, commissions, bonuses or allowances to an employee
- of directors’ fees
- to a religious practitioner
- under a labour hire arrangement
- for a supply of services (except from supplies of goods and real property) where the contractor has not provided you with their ABN.
A non-cash benefit is something you provide instead of paying cash, for example goods or services. In this case, you still need to report the PAYG tax to the ATO in order for this to be classified as a compliant payment and allow you to claim a deduction.
Correcting a mistake
If you withhold an incorrect amount by mistake, you won’t lose your deduction. To minimise any penalties you can correct your mistake by lodging a voluntary disclosure in the approved form.
If you withheld the correct amount but made a mistake when reporting it, you won’t lose your deduction. You should correct your mistake as soon as possible.
Failure to withhold or report
If you should have withheld PAYG tax from a payment but didn’t, you will lose your deduction for that payment, unless you voluntarily tell the ATO before they tell you they have commenced an audit or other compliance activity. You can do this by making a voluntary disclosure in the approved form.
If you withheld PAYG tax from a payment but didn’t report the amount to the ATO at all, you will lose your deduction for the payment unless you report the amount to the ATO before they tell you they have commenced an audit or other compliance activity.
If you haven’t yet lodged your activity statement, you should do so as soon as possible.
The ATO may also charge you penalties for failing to withhold an amount from a payment, or failing to report the amount to them.
Mistaking an employee for a contractor
There may be a situation where you honestly believe your employee is acting as a contractor, so you don’t withhold PAYG tax from their payments as they have provided you with their ABN. In this instance, although you have made a mistake and not withheld PAYG tax from payments you made to your employee, you won’t lose your deduction for these payments because you complied with the withholding obligations for a contractor.
You can correct your mistake by lodging a voluntary disclosure in the approved form.
You can use the ATO’s Employee/contractor decision tool to check if your worker is an employee or contractor.
If you don’t comply with your PAYG withholding and reporting obligations for a payment, you:
- will lose your deduction for that payment
- may face existing penalties that apply for failure to withhold and report amounts under the PAYG withholding system.