As a result of the Black Economy Taskforce’s recommendations the Government has taken firm steps to reduce the loss of tax revenues on unreported payments to employees and contractors. The days of the “cash in hand job” appear numbered.
The final report of the Black Economy Taskforce was released in October 2017 and they claim that “the black economy could be as large as 3% of GDP (roughly $50 billion) today”.
In an effort to reduce the size of the black economy the government has introduced new rules.
From 1 July 2019, cash and noncash payments by businesses to their workers or contractors will not be deductible if they have not complied with the PAYG withholding obligations
for that payment.
Where the PAYG withholding rules apply the business must:
• Withhold the amount from the payment before they pay their worker or contractor
• Report that amount to the ATO
This includes all payments of wages to employees, directors fees and certain supplies of services where a contractor has not supplied an ABN. If the business has not withheld or reported the PAYG amount correctly it will only obtain a deduction if it pays or reports the amount before the ATO start an audit into the business.
However, a deduction will be available for the business if it withholds:
• An incorrect amount by mistake;
• The correct amount but makes a mistake when reporting
But it should correct the mistake as soon as possible to minimise penalties.
This is part of wider suite of measures to tackle the underground economy and the significant tax avoidance that arises in this area.
However, it will also impact legitimate businesses making payments to workers who do not withhold PAYG correctly. For family businesses who make ad-hoc bonus payments to their owners or directors they will need to ensure PAYG is correctly withheld and reported to the ATO to ensure a tax deduction can be claimed.
We are here to help you understand and work through the new rules. Please contact our office for an obligation free discussion about your circumstances.