Summary

If an employer fails to withhold or fails to notify the commissioner of the withholding

• For PAYGW from employees
• Or if no ABN and should have withheld

Then there is no tax deduction.

The Law

This is law: passed royal assent November 2017

• Treasury Laws Amendment (Black Economy Task Force Measures No 2) 2018

Context

The new law denies an income tax deduction for certain payments if the associated withholding obligations have not been complied with. This will provide a greater incentive for employers and entities engaging contractors to comply with their withholding obligations.

Which Payments?

1. PAYGW: Under the Pay-As-You-Go (PAYG) Withholding system, employers must withhold an amount from certain payments for work and services (Subdivision 12‑B in Schedule 1 to the Taxation Administration Act 1953). This includes payments for employees' wages (section 12‑35), payments to directors (section 12‑40), payments made to religious practitioners (section 12‑47) and payments made by labour hire firms (section 12‑60).
2. No ABN: An entity must withhold an amount from a payment it makes to another entity for a supply where the payee has not quoted its Australian Business Number (ABN) (section 12‑190, the ‘no ABN withholding rule’).
3. Non Cash benefits: Under section 14‑5, an entity must pay an amount to the Commissioner of Taxation (the Commissioner) if it provides a non‑cash benefit that – had the benefit been paid as cash – would have been subject to withholding.

And then…

Entities must pay withheld amounts and amounts relating to non-cash benefits to the Commissioner (section 16‑70). Noncompliance is a strict liability offence subject to a penalty of up to 10 penalty units or administrative penalties equal to the value of the withholding amount (sections 16‑25 and 16‑30).

An entity that must pay an amount to the Commissioner (including a nil amount) must also notify the Commissioner (section 16‑150)

In general in the past…

Businesses are generally entitled to claim a general deduction in relation to payments to employees and suppliers (section 8‑1 of the Income Tax Assessment Act 1997 (ITAA 1997)), irrespective of whether the amount was paid or notified. Non payment was subject to other penalties.

The New Law

To encourage voluntary compliance with these withholding obligations, deductions will be denied for payments to which withholding obligations relate if the obligations to withhold or to notify the Commissioner are not complied with at all.

Note: The deduction (if any) will not be available if the entity making the payment has failed to comply with its obligations in relation to the payment to withhold or to notify the Commissioner.

Interesting Details

Incorrect withholding:The deduction is only denied where no amount has been withheld at all or no notification is made to the Commissioner. Withholding an incorrect amount will not affect the entitlement to a deduction

Contractor vs Employee:An employer that makes a payment to an employee they believe to be a contractor is not denied a deduction if, had the employer been correct in characterising the employee as a contractor, the employer would not have been required to withhold. The amendments mirror the relevant provisions of section 12‑190 to determine if this is the case.

However also note:

If an ABN is quoted to you and you have reasonable grounds to believe that ABN belongs to the contractor or alternatively you have reasonable grounds to believe the contractor has an ABN then you do not have to withhold and the tax deduction would apply.

We note the debate may now hinge around “reasonable grounds”

Starts: 1 July 2019