Jeffrey Chang and Jacquie Seemann

Non-compliant payments to workers: is your tax deduction at risk?

Jeffrey Chang and Jacquie Seemann

13 September 2019

Tax Law

Recent changes to tax law give employers greater reason than ever to be extremely careful in complying with their tax withholding obligations.

The changes were made by the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018 – and, as the name suggests, the new rules are primarily designed to target businesses operating off-grid in the black economy.

From 1 July 2019, the ATO will deny a tax deduction for certain payments if the associated tax withholding obligations have not been satisfied.  This could potentially apply to payments:

  • to an employee, director or religious practitioner for work and services under the PAYG withholding regime;
  • to a contractor for a supply of services, if the payee has not quoted its ABN; and
  • to employees or contractors for non-cash benefits, if a withholding obligation would have applied if the benefit were instead paid in cash.

These payments are no longer deductible if the payer had an obligation to withhold an amount from a payment and has failed to:

  • withhold any amount; or
  • report to the ATO the amount required to be withheld.

Since the rules mainly target the black market, mere errors by normally-compliant employers will not generally be a problem.  For example, if an amount is withheld and reported, but the employer calculated the withholding incorrectly, then the payment will not be rendered non-deductible by reason of that error.  Deductibility will also be preserved if, before the commencement of an ATO investigation, the employer voluntarily discloses to the ATO its failure to withhold or report.

Exceptions to non-deductibility also apply if a payment is made to a person (or agent of that person) who is working as a contractor and has quoted an ABN.  This is designed to protect an employer that honestly believes the worker is a contractor.  However, there is some ambiguity in the provisions about how the ATO will deal with a situation in which an employer has paid a company (which has quoted an ABN) that purports to employ the worker, when as a matter of fact and law the worker is really employed by the employer. As always, employers should be extremely cautious about how they treat a ‘contractor’, and really consider whether the worker in question should more properly be treated as an employee.  As well as the potential issue of non-deductibility, in a sham contracting arrangement the employer (of course) also potentially faces liability for employment entitlements, superannuation and payroll tax.

If you would like assistance with understanding or managing your withholding obligations, or your employee/contractor relationships more generally, please contact a member of our Employment, Workplace Relations and Safety Team.