Dec 2018 2 Minutes

Denying Deductions for Non-Compliant Payments

The Treasury Laws Amendment (Black Economy Taskforce Measures No 2) Bill 2018 received Royal Assent on 29 November 2018. Schedule 1 of the Bill will disallow a taxpayer from claiming an income tax deduction for certain payments where the required withholding obligations were not complied with. The Bill applies from 1 July 2019.

The proposed section 26-105 would affect the following payments:

  • Payments to employees;
  • Payments to directors;
  • Payments to religious practitioners;
  • Payments under a labour hire arrangement;
  • Payments for a service where no ABN has been quoted.

Whilst the new rules are aimed at denying deductions for so called “cashies”, it is important to note that the amendment also captures non-cash benefits provided in-lieu of a cash payment.  In both cases a deduction will also be denied for payments where the obligation to withhold was made but not notified to the ATO.

Where a taxpayer withheld an incorrect amount and has notified the ATO, a deduction will still be available. The ATO provides an opportunity for taxpayers to correct any contraventions made provided an amount has been withheld and a notification has been made. The amendment appears to primarily target total failures to withhold.

The ATO recognises that there are situations where an employer honestly believes their employees are acting as contractors even where this position is not upheld by the ATO. In these circumstances, the proposed amendment does not deny a deduction to the taxpayer provided the taxpayer has appropriately withheld payments made to the “employee”.

The introduction of this measure goes hand-in-hand with the expected mandatory adoption of Single Touch Payroll (STP) for all employers from 1 July 2019. Legislation to extend STP to employers with 19 or less employees is currently before Parliament and once it has received Royal Assent, same-day reporting for wages and director fees will be mandated for every employer in Australia.

If you have any further queries, please contact the Walker Wayland office and speak with Heeral.