In the recently released draft legislation by the government, businesses will not be any longer allowed to claim the deduction for payments to employees whenever they have not met the Pay As You Go (PAYG) obligations. This deduction applies on certain payments including, payment of wages and payment to a contractor where an employer is required to withhold its PAYG benefits from the gross payments, but fail to report or remit it to the Australian Taxation Office (ATO).

Eligibility Circumstances

In case, the PAYG’s withholding regime is applied to the certain payments and the employer did not withhold the amount from the payment or did not notify the ATO, the amendment to legislation which is intended to come in effect from the date of Royal Assent i.e. 1 July 2019 will not allow any deductions in salary and wages, bonus and commission, directors’ fee, labour hire arrangement and other allowances to an employee.

As originally a part of the federal budget, PAYG withholders are required to make sure that all the lodgements are made on time to avoid any penalties. The EM i.e. explanatory memorandum to the draft legislation mentions that the recent amendment is intended with a goal to create financial disincentives to businesses that are making payments to those operating in the black economy. Also, the disincentive created by denying the tax deduction will complement the existing penalties for failures to withhold an amount under the PAYG system.

Proposed Exceptions/Exemptions

An exception is provided where an employer believes that its employees are acting as contractors and an ABN has been provided. They will not be denied a deduction if the employer is correct in characterizing its employee as a contractor.

A deduction that would otherwise be denied is restored in case a taxpayer voluntarily notifies the commissioner of the mistake, well before the commencement of an audit or any other compliance activity.

For further information on no tax deduction amendment, please contact our accountants and tax specialists at KPG Taxation or request a free consultation.