Removing tax deductibility of non-compliant payments

From the 1st July 2019, employers who do not comply with their PAYG Withholding obligations will be denied of their tax deductions.

What business owners needs to know:

Among the prevalent law changes administered by the Australian Tax Office (ATO) is the streamlining of our payroll process via Single Touch Payroll (STP) which has commenced last 1 July 2018 for employers with 20 plus staff

However, from 1 July 2019, opt-in to STP will be compulsory to all employers.

The other notable change is that, business owners will be disallowed of their income tax deduction where no amount was withheld nor reported on payments made to their employees. Reporting to the ATO can be done through STP notification, Business Activity Statement, or Instalment Activity Statement.

The objective of this reform is to ensure that business entities will take reasonable care to comply with the PAYG withholding rules and reporting obligations set by the government, so they won’t be denied of their claim deductions on otherwise deductible payments.

These includes:

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

Provision for non-cash benefits (payment by goods or services) will be the same. PAYG tax should still be reported for this to be classified as a compliant payment.

Non-compliance of this could also mean losing the deduction and being liable to administrative penalties.

However, employers will still be entitled to their full deductions if:

    • they withheld an incorrect amount by mistake
    • they withheld the correct amount but made a mistake when reporting
    • they should have withheld PAYG tax but didn’t

Consideration will be given provided they have voluntarily disclosed the following to the ATO via the approved form to correct the mistake before the ATO have commenced any audit or other compliance activity.

Mistaking an employee for a contractor.

Employers are also required to withhold certain PAYG tax to contractors who do not quote a valid ABN. Accuracy of the ABNs can be identified by checking the Australian Business Register.

Situations where an employer genuinely believes that an employee is a contractor can correct their mistake by lodging  a voluntary disclosure in the approved form.

In this case, employer will still be entitled to the full deduction.


For  ATO’s full disclosure, please visit their website through this link here.