Government removes tax deductions for non-complying payments

Effective from the 1^st of July 2019, the government has announced that deductions relating to payments of wages and other payments that do not comply with the pay as you go withholding requirements (PAYG), will not be allowed to be claimed as a deduction. Entities may also face penalties for non-compliance.

Payments that are affected by this new legislation include:

• Salaries and wages
• Commissions/bonuses and allowances
• Labour hire contracts
• Payments where an ABN or TFN has not been provided
• Director fees
• Non-cash benefits (such as goods and items given as payment instead of money)

It is important to note that this only applies when there is an obligation to withhold but the entity does not. Additionally, if the entity complies and withholds tax but does not report to the ATO, then the deduction will not be allowed. If an incorrect amount is withheld or mistake is made, then the deduction will still be allowed, although the entity must contact the ATO and notify them of the error so the deduction may be permitted.

There is also some flexibility in the new measures surrounding a business mistaking an employee as a contractor. If a business were not to withhold tax for a contractor they believe to be an employee, as long as all other obligations are met for the contractor, the deduction may still be allowed, provided the ATO is notified of the error. It is the payer’s responsibility to ensure the PAYG obligations of their employees and contractors are met to avoid breaching this new legislation.