• Sustaining voluntary compliance with PAYG withholding

    Under the pay as you go (PAYG) system, employers withhold amounts from payments they make to their employees. In 2012–13, we collected $149.8 billion in gross PAYG withholding.

    However, some employers fail to correctly report and pay withheld amounts to us. To detect underpayments, we can compare the credits employees claim in their income tax return with the amounts reported by their employers.

    The main reason employers under-report amounts they withhold is poor business administration, particularly poor record keeping and lack of planning. Other reasons include debt, cash flow problems and personal issues. In a smaller number of cases, employers who lodge on time and keep updated records might unintentionally understate the amounts withheld.

    Each year, up to 60,000 out of the 800,000 employers across Australia fail to report or pay all their employee withholdings over the year. For many there is only a small underpayment, but with higher amounts we conduct field visits to bring the employer’s compliance back into line. Unless the reasons for non-compliance are investigated and specifically addressed with the employer, there is a significant risk that non-compliance will continue.

    Helping employers to comply

    Where we identify that employers have not reported all the amounts withheld, we visit them to review their records, work through their reasons and drivers for non-compliance, and help them meet their obligations now and in the future.

    Past experience has taught us that failure to address the underlying causes results in up to 15% of employers reverting to past behaviours within twelve months of an audit. After revisiting these employers, we found that many of them had not changed their business practices and the same problems that caused their original non-compliance were driving the repeated behaviour.

    As a result, we reviewed what we do in our field audits to help employers avoid future non-compliance. Changes to our approach include:

    • clarifying any obligations that employers misunderstood
    • promoting tools to help improve cash-flow management and record keeping
    • setting up audit debt repayment arrangements.

    We work with employers at the audit to ensure their reporting is accurate and up to date so they can operate without any compliance backlogs that may cause repeated non-compliance.

    The early intervention of our field auditors is very important. We found that complex and long-standing cases that were difficult to resolve often left employers with a sizeable debt they were unable to repay while keeping up with current compliance. By detecting cases and visiting employers early, our auditors are able to help employers reduce their non-compliance and manage their audit debts while complying into the future.

    Our approach helps to provide a level playing field for employers who are doing the right thing. Some employers are unable to comply after an audit, often because their businesses are only viable if they do not pay the withheld amounts. In some cases, businesses cannot continue. While this is unfortunate for the particular business, it means that other businesses don't have to compete against those employers who are using amounts withheld from their employees to prop up their business.

    Measuring the impact of our approach

    To help us measure our effectiveness, we monitor all audited employers and detect those who repeat non-compliance within two years of an audit.

    Our aim is to keep ongoing non-compliance cases to 2% of those audited. Factors affecting employers and their businesses, such as tight credit and unfavourable trading conditions, can have a strong impact on outcomes. However, our approach has seen the proportion of employers who repeat non-compliance within two years of an audit drop from around 15% in 2005–06, to 2.29% in 2012–13.

    We also calculate the value of the ongoing compliance by the audited employers who stay compliant. We estimate this indirect revenue by calculating the average value of non-compliance in current-year cases and multiplying it by the number of employers who sustained their voluntary compliance post audit. The result for 2012–13 was that we prevented further non-compliance which equates to $353.1 million in protected revenue.

    We find that taking more time to work with employers on the issues that lead to non-compliance, contributes to significantly improved and sustained post-audit compliance.

    Last modified: 07 Mar 2016QC 37653