Tax Deductions Denied for Non-Compliant Tax Withholding Obligations as of 1 July 2019
The Black Economy continues to come under sustained fire but as is so often the case, collateral damage is only natural as small businesses suffer ever increasing compliance obligations and ever reducing flexibility regarding how they manage their businesses, and their tax obligations.
The Treasury Laws Amendment (Black Economy Taskforce Measures No 2) Bill 2018 receives Royal Assent
On 29 November 2018 the Australian Legislature brought to life measures first announced in the 2018 Federal Budget to stem the use of cashies and at the same time tighten the noose around the metaphorical necks of Australian small business owners.
It means that as of 1 July, if a business makes a payment to which a withholding obligation technically applied and no such withholding occurred, then the payment is no longer tax deductible (no matter how large or small)!
Payments impacted broadly include –
- ordinary salaries and wages
- similar remuneration payments such as commissions, bonuses and allowances
- payments under labour hire arrangements
- as well as payments for services to non-employees where an ABN has not been quoted by the provider.
Further, as a blow to the flexibility available for small business tax planning strategies, it also impacts Director’s Fees and associated payments to business owners!
An example –
A business engages the son of an employee to perform some ad hoc cleaning duties.
As the work to be performed is a one-off and for a short time only, it is not deemed appropriate nor worthwhile to formerly employ the son including going through all of the associated paperwork.
Therefore it is agreed to pay the son as a contractor.
However, as the son has never owned or operated a business, nor provided contract services before, he does not have an ABN.
Regardless the employer chooses to pay the son the amount promised, and does not withhold (the near 50%) tax as is required because it seems unfair.
The result, under these new laws, because the employee had a withholding obligation and did not comply with that obligation, the payment to the son (for legitimate work performed for the benefit of the business) is NOT tax deductible (though note, the money received by the son remains taxable to him).
Non-cash Benefits Also in the Firing Line
The new laws are of course primarily aimed at cash payments, including the Black Economy favourites known as “cashies” but they also extend to the “beer economy” and similar forms of barter arrangements.
Where non-cash benefits are provided instead of or in-lieu of cash, the same tax deduction denial applies if withholding obligations are not met.
Withholding Alone Isn’t Enough, You Must Report Too
In both cash and non-cash scenarios, tax deductions will also be denied if the withholding occurs, but it is not reported to the ATO.
The Rules Aren’t Completely Inflexible
The good news is, so long as an effort to comply is made, the rules are not completely inflexible as is the case for an increasing number of provisions (specifically those relating to superannuation).
Where a business has made a withholding, even if the amount withheld was incorrect, and they notify the ATO of the error, a tax deduction will still be permitted.
Further, the new rules provide that where a business believes they are not required to withhold but ultimately they are proven to be wrong, the tax deduction will not be denied provided all other obligations surrounding the payment have been met.
The Net Grows Wider, and Tighter
These new rules come on the back of the new Single Touch Payroll (STP) obligations.
STP applies to larger businesses as of this year, but they are expected to apply to all businesses as of 1 July 2019.
It means that Australian Small Businesses must have their accounting and record keeping systems and processes fully in order, accurate and able to comply on a recurring and timely basis including same-day reporting. The scope for flexibility and the ability to cost effectively and time efficiently address errors is being limited ever further.