Tax deductibility of ‘non-compliant’ payments

From 1 July 2019, businesses will only be able to claim deductions for payments that are made to workers (employees or contractors) when the employer has complied with the pay-as-you-go (PAYG) withholding and other tax reporting obligations for that payment.

If the PAYG withholding rules require a business to withhold an amount from a payment that the business makes to a worker, the business must:

• withhold the amount from the payment before it is paid, and
• report the amount to the ATO.

Any payments that are made where the business hasn’t withheld or reported the PAYG tax are dubbed by the ATO to be “non-compliant payments”, and for these an employer will not be able to claim a deduction.

Note however that if the employer makes a mistake and withholds or reports an incorrect amount, they will generally not lose their deduction — as long as the ATO is notified and a correction is made.

Payments that must comply

An employer can only claim a deduction for the following payments if they comply with the PAYG withholding rules. This includes payments:

• of salary, wages, commissions, bonuses or allowances to an employee
• of directors’ fees
• under a labour hire arrangement, and
• for a supply of services (except from supplies of goods and real property) where the contractor has not provided their ABN.

For further assistance contact Expert Tax on 0449 952 855 or 1300 869 829.