The Australian Taxation Office has announced the removal of deductibility of non-compliant salary expenses and companies must act urgently before its implementation on 1 July 2019.
The Australian Taxation Office ("ATO") announced legislative changes on 5 April 2019, which will have the significant impact of denying a deduction to an employer for payments to employees and contractors where the payer fails to withhold Pay As You Go ("PAYG") amounts from the payments or fails to notify the ATO accurately and timely. Until now, salary and wage like expenses have been available for deduction against business income. Alongside the implementation of Single Touch Payroll ("STP"), increased superannuation compliance requirements and other real-time data collection measures, a much higher level of scrutiny will be applied by the ATO with respect to 'non-compliant' salary and wage declarations, commencing from 1 July 2019, so action is required now to prepare for the changes.
Remuneration, whether in the form of salaries and wages, director's fees, labour hire or certain goods and services, is required to have PAYG Withholding applied. This is intended to cover an employee's total income tax liability in relation to the payments received from their employer.
Situations can arise where salary declarations occur late, for example at the time of financial report preparation post reporting period or after a reclassification of drawings, and effectively no PAYG Withholding will have been applied on those transactions.
The ATO aims to curb this practice or occurrence of events by disallowing a deduction in relation to any non-compliant payment:
- of salary, wages, commissions, bonuses or allowances to an employee;
- of directors' fees;
- to a religious practitioner;
- under a labour hire arrangement; or
- for a supply of services - excluding supplies of goods and supplies of real property - where the payee has not quoted its Australian Business Number.
The ATO's focus is on businesses not conforming to their PAYG obligations whether it be through failure to make a withholding from a payment or failure to notify the ATO.
In addition to being disallowed a tax deduction, penalties may apply commensurate with the value of the unreported / unpaid amount and degree of carelessness demonstrated by the employer.
Action for businesses
From 1 July 2019, employers are strongly urged to withhold the requisite levels of PAYG Withholding and report the same to the ATO by the deadlines, or risk foregoing their entitlement to a deduction for the relevant payments.
The ATO will make allowances for mistakes and genuine errors. Most typically, this may involve reporting / withholding an incorrect amount or wrongly categorising an employee as a contractor. In the event of these situations, self-correction is possible by the resubmission of amended reports being lodged with the ATO or by making submissions through voluntary disclosure channels. If you are able to demonstrate that you are implementing these actions as soon as the omission has been identified, then the ATO will allow tax-compliant deductions for the affected payments.
The ATO is applying an increased level of scrutiny to the declaration of salaries and wages. This will have effects with respect to superannuation obligations, WorkCover, payroll tax compliance, etc. Nothing in these changes is intended to impede compliant employers, this increased focus is intended to identify businesses that are not meeting their obligations or are struggling to manage their payment processes and require assistance and education to become compliant employers. As with most things tax related, meeting your tax reporting obligations on time and with accuracy and having a regular review of your processes to keep them up-to-date will be the best defence in ensuring tax risks are mitigated. With these changes, imminent action to review your processes must be given priority.
Talk to us
TMF Australia monitors changes to all rules and local regulations. We can provide assistance with the calculation, reporting and payment of the withholding amounts to the ATO, keeping you compliant as rules change.
Please note that the above article is not tax advice, nor should it be construed as such. It is general in nature and for information purposes only.
For further information, contact our experts in Australia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.