OK maybe that’s a little extreme but we wanted an extreme heading as we think this is a really important change for business owners to be aware of.
Let us explain….
New laws were passed late last year (relatively on the quiet I might add) that means if you need to withhold tax from a payment and you didn’t, then the payment may not be tax deductible for you. These are called ‘non-compliant’ payments under the new rules which kick-off on 1st July, 2019.
These new rules have been introduced as part of the Government’s crack down on the cash economy, however, we feel that the effect of these rules may be further reaching across a number of business transactions.
So what’s an example of a payment I need to withhold tax from?
- Employee Wages: The most common example is wages, bonuses and allowances paid to employees – every business owner should be familiar with the need to withhold tax from your employee wages.
- Supplier and Contractor Payments: If you make a payment to another business and they do not quote an ABN then you are required to withhold 47% as ‘No ABN Withholding tax’. There’s only a few exemptions to this rule – check out the ATO guide for more info.
- Payments to Family Members: Another example is payments to family members and business owners. Think payments like Director’s fees, family wages, family allowances and bonuses. Often this is done as part of the year-end business tax preparation process, so we believe that this may catch some businesses unaware. This will mean much more careful preparation and planning may be required before the end of the financial year.
But wait there’s more. There’s two parts to the new rule. The payment will NOT be a tax deduction where:
1) No amount has been withheld at all (but note if the payment is of a type where there is no requirement to withhold like a travel reimbursement to an employee then it will still be deductible)
2) No notification is made to the Commissioner
The “OR” is where this can really get business owners in a sticky situation. The “no notification is made to the Commissioner” includes situations where either you should have reported the withholding amount on your BAS (for instance at the W2 Tax Withheld box on your BAS) but you didn’t, or, you haven’t reported the withholding amount on your BAS yet because you’re late lodging your BAS.
Importantly if there is no requirement to withhold tax from the payment then you are fine.
It is now more important than ever to lodge your BAS on time. You are at risk if you haven’t lodged a BAS and the ATO start compliance action because you will NOT have met the “notification to the Commissioner” rule so the payment won’t be deductible!
What happens if I didn’t withhold tax when I should have?
Unfortunately the new rules are harsh. The amount you paid to the employee, family member or supplier will not be a tax deduction.
There are provisions to correct your mistakes. If you didn’t withhold then you should correct this as soon as possible by advising the ATO – you can do this by lodging a revised BAS. If you haven’t corrected your mistake and the ATO commence an audit or review then the payment will not be a tax deduction. There are some allowances for a genuine mistake – you won’t lose the deduction if you withheld an incorrect amount by mistake however the ATO recommend you correct this as soon as you become aware of it.
What should you do to reduce your risk in preparation for the new rules?
- Check your supplier invoices to make sure their invoices quote an ABN. If not, you should not make payment, but rather immediately request the ABN. If the supplier does not provide the ABN and they are not exempt then you must withhold the tax, pay the amount of withholding with your next BAS and complete a year-end payment summary
- Do a Payroll Health check – make sure you are withholding tax on the correct amounts – look out for Bonuses, allowances, termination payments, lower income or short-term employees as these are all slightly out of the ordinary and it’s easy to make an error.
- Lodge your BAS on time and make sure all your BASs are up to date
- Do some tax planning prior to 30th June each year – review your numbers and sit down with your accountant to talk about tax planning including whether any Director’s fees or wages to Family members need to be accounted for.