Edited version of private advice

Authorisation Number: 1052241055545

Date of advice: 2 August 2024

Ruling

Subject: PAYG withholding - obligation to report unpaid wages

Question 1

Do the unpaid wages reported in the Profit & Loss Statement for the year ending 30 June 2023 constitute a payment to the store manager in accordance section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953)? If so, does payment occur when the wages are credited to the shareholder loan account or at some other time?

Answer

If you are making payments to employees as remuneration, you may have a tax obligation to withhold tax from that payment under the Pay As You Go Withholding (PAYGW) system. Section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) requires an entity, who pays salary, wage, commission, bonuses or allowances to an individual as an employee, must withhold an amount from the payment.

Withholding may be required, not only from payments of salary or wages made to an employee as such, but also where there is a constructive payment of salary or wages. A constructive payment under section 11-5 of Schedule 1 of the TAA 1953 refers to circumstances when an entity (the payer) has paid an amount to another, for example an employee or director, and when the payment is made, the amount is taken to have been paid to the other party when the payer applies or deals with the amount in any way on the other party's behalf or as the other party directs.

In your case, employee and director Employee 1 worked one day a week between XX Month 1 20XX to YY Month 2 20XX. Wages were accounted for in your records for each day Employee 1 worked. The wages for this period were unpaid to Employee 1. However, Employee 1 instructed you to transfer the total unpaid wages balance to the Loan Account A. This action has created a constructive payment. The unpaid wages have been paid to Employee 1 as a result of her instructing you to pay her in this way. Therefore, on ZZ Month 2 20XX, you paid Employee 1 her unpaid wages. The ZZ Month 2 20XX is the date that your records show the total balance of the expense account were transferred to the balance sheet account Loan Account A.

Therefore, you had an obligation under section 12-35 of Schedule 1 of the TAA 1953 to withhold from the wage amount paid to the employee on the ZZ Month 2 20XX.

Question 2

Are you required to withhold PAYGW for this amount? If so, does this obligation arise when the unpaid wages amount is credited to the shareholder loan account, or at some other time?

Answer

Yes, in accordance with section 12-35 of Schedule 1 of the TAA 1953, you are required to withhold PAYGW from the unpaid wages. You are required to withhold because the unpaid wages is a constructive payment as per section 11-5 of Schedule 1 of the TAA 1953. The date the PAYG withholding event occurred is the ZZ Month 2 20XX.

Question 3

If you are required to withhold PAYGW for this amount, do you need to amend the Business Activity Statement and Single Touch Payroll Statement for the June 20XX quarter to include additional PAYG withholding amount?

Answer

In accordance with section 389-25 of Schedule 1 of the TAA 1953, you may correct a statement you have made in Single Touch Payroll. Instrument STP 2019/5 establishes a grace period which allows you to correct an error no later than:

•         the 14^th day after the day you become aware that the statement is false or misleading or

•         the 14^th day after the end of the relevant financial year in

In your case, you have 14 days from the date of this correspondence to correct a statement in your Single Touch Payroll and the relevant Business Activity Statement.

Question 4

Is the company required to pay Superannuation Guarantee for these unpaid wages amount?

Answer

Yes, the company is required to pay Superannuation Guarantee on the unpaid wages amounts in accordance with section 17 of the Superannuation Guarantee (Administration) Act 1992. The amounts are wages when paid to the employee on ZZ Month 2 20XX.

Question 5

If the company is required to pay Superannuation Guarantee for this amount, does the company need to submit a Superannuation Charge Statement for the additional Superannuation Guarantee and pay any late fee incurred?

Answer

Yes, the company is required to submit a Superannuation Charge Statement for the wages paid on the ZZ Month 2 20XX in accordance with sections 33 and 37 of the Superannuation Guarantee (Administration) Act 1992.

Question 6

If payment of the unpaid wages amount does not occur in the year ending ZZ Month 2 20XX and as such, no PAYGW or Superannuation Guarantee is remitted, is the company entitled to a deduction for the unpaid wages expense?

Answer

Businesses are generally entitled to claim an income tax deduction in relation to payments to employees and suppliers. However, from 1 July 2019 section 26-105 of the Income Tax Assessment Act 1997 (ITAA 1997) denies a deduction for certain payments for work and services if the payer fails to withhold an amount or comply with section 16-150 of the TAA 1953 or to report/notify the Commissioner of the amount under section 389-5 of the TAA 1953. Payments such as wages to employees that are subject to PAYG withholding can be such a payment that is denied as a deduction. Also a deemed payment arising from the provision of a non-cash benefit which is subject to withholding can also be denied as a deduction if you don't comply with withholding obligations.

There are three exceptions that may entitle you to claim an income tax deduction for a payment an employee and/or supplier where you fail to withhold amount or report a withheld amount to the Commissioner:

1.    Under subsection 26-105(4) of the ITAA 1997, if the amount required to be withheld or paid is a nil amount ($0),

2.    Where you make a mistake and treat the person as working for you as an independent contractor when in fact, they are an employee. In these cases, you had obtained an invoice that quotes their Australian Business Number (ABN) and you don't withhold an amount from their payment. If you have no reasonable grounds to believe the ABN is not the independent contractor's or that the ABN is incorrect, under subsection 26-105(5) of the ITAA 1997 you can claim the payment as an income tax deduction. This also applies in circumstances when a supply is made through an agent.

3.    If you voluntarily tell the Commissioner on the approved form that you failed to withhold an amount or report/notify an amount before the Commissioner advises you that an examination (such as an audit or other compliance activity) of your tax affairs is commenced for a relevant period as per subsection 26-105(7) of the ITAA 1997.

You have failed to withhold an amount from the wages paid to the employee on ZZ Month 2 20XX or report a PAYG withholding amount to the Commissioner. Therefore, you would not be entitled to claim an income tax deduction in relation to the payment to the employee. However, in your case, if the amount required to withhold or pay is nil OR you voluntarily tell the Commissioner, on the approved form, that you failed to withhold an amount or report/notify a PAYG withholding amount before the Commissioner commences compliance action on your tax affairs for a relevant period, you are entitled an income tax deduction.

This ruling applies for the following period:

year ending ZZ Month 2 20XX

The scheme commenced on:

XX Month 1 20XX

Relevant facts and circumstances

You were registered with the Australian Securities and Investment Commission (ASIC) on Date.

You are associated with XX unrelated family trusts. Each trust has XX individual trustees.

The trustees of each trust are directors of Company Pty Ltd and shareholders that have equal shareholding in you.

You commenced operating a business, known as Trading Name, on Date.

The store manager, on a full-time basis, is Employee 1.

Employee 1 is also a director to the company.

Employee 1 carried out the record keeping for the company.

The directors agreed to pay Employee 1 a wage or salary. There is no employment contract. This wage or salary amount is documented in the business plan.

Between Month 3 20YY to Month 4 20XX, you paid Employee 1 her wage or salary. The wage or salary was paid into Employee 1's bank account during this period time. You withheld PAYG Withholding amounts from Employee 1's wage or salary payments and made appropriate superannuation guarantee payments.

In Month 5 20XX, Employee 1 commenced working X days a week part-time for a different unrelated employer. You agreed that Employee 1 would be paid the equivalent of X days full-time working as store manager in the store.

Due to cashflow issues, the directors and/or each family trust routinely contributed funds to you equally. These contributions are recorded in the company's balance sheet under the directors name. There is no written requirement for the family trusts or your directors to contribute funds. The contribution of funds is made by choice in order to keep the company solvent.

Due to the cashflow issues, Employee 1 instructed the company to not pay wages owing to her until the company's financial position improves. This instruction was not documented. Two of the directors did not agree to this instruction.

Employee 1's unpaid wages for the period of Month 1 20XX to Month 2 20XX totalled $amount.

For accounting purposes, the unpaid wages have been posted in a manual journal entry as at ZZ Month 2 20XX. Weekly unpaid wages from the XX Month 1 20XX to YY Month 2 20XX have been debited to the expense account "Salary - unpaid" totalling $amount. The same total amount was credited to the balance sheet account Loan Account A.

The profit and loss statement for the year ended report "Salary - unpaid" shows $amount being posted and contributing to the total operating expenses amount for the year.

The general ledger account for Loan Account A shows the credit balance increasing by $amount. The credit balance of this account is reported in the balance sheet as at ZZ Month 2 20XX, under the current liabilities section, as $amount.

Profit and loss statement for the year ended 30 June 2023 reported income and expenses to calculate the net profit. The operating expenses includes "Salary - unpaid" account reporting $amount.

No PAYG withholding or superannuation guarantee was paid on this amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 26-105

Income Tax Assessment Act 1997 subsection 26-105(4)

Income Tax Assessment Act 1997 subsection 26-105(5)

Income Tax Assessment Act 1997 subsection 26-105(7)

Superannuation Guarantee (Administration) Act 1992 section 17

Superannuation Guarantee (Administration) Act 1992 section 33

Superannuation Guarantee (Administration) Act 1992 section 37

Taxation Administration Act 1953 section 11-5 of Schedule 1

Taxation Administration Act 1953 section 12-35 of Schedule 1

Taxation Administration Act 1953 section 16-150 of Schedule 1

Taxation Administration Act 1953 section 389-5 of Schedule 1

Taxation Administration Act 1953 section 389-25 of Schedule 1