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  • Removing tax deductibility of non-compliant payments

    You can only claim deductions for payments you make to your workers (employees or contractors) from 1 July 2019 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 to them
    • report the amount to us.

    Any payments you make to a worker where you haven't withheld or reported the PAYG amounts are called non-compliant payments.

    You won't be able to claim a deduction if you are required to withhold an amount and you don't withhold or report any amount to us, unless you voluntarily tell us before we advise that we have commenced an audit or other compliance activity.

    How you voluntarily tell us will depend on whether you failed to withhold or report.

    If you make a mistake and withhold or report an incorrect amount, you won't lose your deduction. You still need to correct your mistake as soon as possible to minimise penalties.

    You won't lose your deduction for failing to report payments on a Taxable payments annual report (TPAR) or a PAYG withholding payment summary annual report (PSAR).

    Watch:

    Media: Don't lose your deduction for payments to workers
    http://tv.ato.gov.au/ato-tv/media?v=bd1bdiunq9wrtfExternal Link Duration: (0:15)

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    Types of payments affected

    You can only claim a deduction for the following payments if you comply with the PAYG withholding and reporting requirements for that payment. These are payments:

    • 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 either wholly or partly of services where the contractor has not provided you with their Australian business number (ABN).

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    Non-cash benefits

    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 withholding amount to us in order for this to be classified as a compliant payment and allow you to claim a deduction.

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    Correcting a mistake

    If you withheld an incorrect amount by mistake, or withheld the correct amount but made a mistake when reporting it to us, you won't lose your deduction. To minimise any penalties you should still lodge a voluntary disclosure in the approved form as soon as possible.

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    Telling us about a failure to withhold or report

    If you should have withheld a PAYG amount from a payment but you didn't withhold any of it, you will lose your deduction for that payment. That is unless you voluntarily tell us before we tell you we have commenced an audit or other compliance activity involving your PAYG withholding obligations or deduction claims. You can tell us by making a voluntary disclosure in the approved form.

    If you withheld a PAYG amount from a payment but didn't report any of the amount to us, you will lose your deduction for the payment. That is unless you make a voluntary disclosure before we tell you we have commenced an audit or other compliance activity involving your PAYG withholding obligations or deduction claims. You can make your voluntary disclosure by reporting the amount to us via your activity statement or Single Touch Payroll (STP).

    We may also charge you penalties for failing to withhold an amount from a payment, or failing to report the amount to us.

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    How we tell you about an audit

    There are different ways we can tell you that you have been selected for an audit or other compliance activity. We will usually phone you, or we may tell you in person or in writing. We will also tell you the scope of the audit and the period(s) under review.

    Mistaking an employee for a contractor

    There may be a situation where you make a mistake and treat the person working for you as a contractor when they are in fact your employee. As a result of your error, you obtain an invoice that quotes their Australian business number (ABN) and you don't withhold an amount from their payments.

    In this instance, you won't lose your deduction for these payments if, at the time you thought they were a contractor, you complied with both of the following obligations:

    • you obtained an invoice, or some other document relating to the payment that quoted the contractor's ABN
    • you have no reasonable grounds to believe that it's not the contractor's ABN or that the ABN is not correct.

    You can correct your mistake by lodging a voluntary disclosure in the approved form.

    You can use our Employee/contractor decision tool to check if your worker is an employee or contractor.

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    Payments to contractors

    You will not lose your deduction for a payment you make to a contractor for their services if both of the following apply:

    • you have been given an invoice, or some other document that relates to the payment that quotes the contractor's ABN
    • you have no reasonable grounds to believe that it's not the contractor's ABN or that the ABN is not correct.

    It is always good business practice to check the ABN on the invoice and to check the contractor is registered for GST if they have charged GST.

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    Penalties

    If you don't comply with your PAYG withholding and reporting obligations for a payment, you may:

    • lose your deduction for that payment
    • face existing penalties that apply for failure to withhold and report amounts under the PAYG withholding system.

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      Last modified: 30 Oct 2019QC 57530