How changes to PAYG withholding obligations can affect your business

Is your business ready for the changes coming to PAYG withholding?

It is important for you to note that commencing 1 July 2019, you can only claim a tax deduction for payments you make to your workers (employees or contractors) where you have complied with the Pay As You Go (PAYG) withholding and reporting obligations for that payment.

PAYG withholding obligations can apply to a range of payments – not only payments you make to employees but also, for example, to payments to genuine contractors that don’t provide an ABN.

As a result, this change has the potential to affect a wide range of businesses such as those engaging contractors via trusts and companies, consultants that provide labour, or employees where PAYG is not withheld for some reason.

While the change has a broad application, it could have a more significant impact on businesses engaging individual contractors where the ATO may consider the contractors to be employees and therefore subject to PAYG Withholding and other obligations.

In the past, whether an individual worker was a contractor or an employee was often highlighted as an issue because it was on the ATO’s radar for superannuation purposes (noting that even individual contractors that provide labour can be subject to superannuation).  However, the change being implemented on 1 July 2019 could have a more significant impact on payments to individual workers.

If, for example, you contracted to three individual contractors during the year, didn’t take the time to assess their role as employee or contract, and paid each of them $50,000 you expect to receive a tax deduction for their costs.  However, from 1 July if the ATO considers these contractors to be employees, superannuation has not been paid and PAYG not withheld, your business could:

  • Miss out on a tax deduction of $150,000.  At the highest marginal tax rate this means paying an additional $70,500 tax.
  • Be required to pay superannuation of 9.5% on the payment, being an additional $14,250 for this and possibly prior years.
  • Be liable for additional penalties for not meeting your PAYG W and superannuation obligations.

This can be avoided by speaking to your accountant regarding any contractors you currently engage, or intend to engage.

The ATO has a great list of Myths and Facts when it comes to contractors and we recommend you review this information before 1 July 2019.

Note that a tax deduction will still be allowed for payments made to an individual contractor where you honestly mistake an employee for a contractor (provided they supply their ABN) so making sure you consider each contractors individual position prior to 30 June 2019, preferably by applying the ATO’s employee/contractor decision tool.

If you have any queries regarding this information please don’t hesitate to contact our office.

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