I have spent some time working with the Inland Revenue Division of the Solomon Island. Way back in 2005 the Solomon Island Government introduced subsection 20(2A) into their income tax legislation. It states:
By 1 July 2019 the Australian tax system will catch up with our neighbours (this is and unfair criticism as the Solomon Island IRD collects a lot more final withholding taxes than we do in Australia).
In Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018 the Government is proposing a similar rule for the Australian tax system – denying an income tax deduction for certain payments if the associated withholding obligations have not been complied with.
In summary, a deduction is not allowed in relation to a payment:
- of salary, wages, commissions, bonuses or allowances to an employee;
- of directors’ fees;
- to a religious practitioner;
- under a labour hire arrangement; or
- for a supply of services — excluding supplies of goods and supplies of real property — where the payee has not quoted its ABN
if the PAYG Withholding regime applied to the payment, the payer was required to withhold an amount and the payer did not withhold an amount from the payment or did not notify the Commissioner when required to do so.
Miss your withholding… miss your deduction.
But there are a few exceptions to this rule
1. 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. Neither does reporting the wrong amount.
2. This change does not apply to an obligation to withhold a nil amount from a payment, or to report a nil amount that must be paid to the Commissioner.
3. If an employer that makes a payment to an employee they believe to be a contractor, they will not be 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 or withheld under no ABN withholding.
Example 1.1 Incorrectly classified employee payments (from the EM)
Super Express Deliveries Pty Ltd carries on a business as a bicycle courier service. Super Express Deliveries engages around 30 bicycle couriers to enable it to fulfil orders from its customers.
Super Express Deliveries seeks legal advice about the engagement of the bicycle couriers. The advice concludes the bicycle couriers are independent contractors and are not employees. To this end, Super Express Deliveries requires each of its bicycle couriers to obtain an ABN and provide it to the company. Super Express Deliveries concludes that it did not have to withhold any amounts from the payments it made to couriers.
The Commissioner conducts an audit of Super Express Deliveries and decides that the bicycle couriers are employees of Super Express Deliveries. After considering the Commissioner’s reasons and legal authorities, Super Express Deliveries does not dispute this conclusion and agrees to begin fulfilling its withholding obligations on this basis.
The deduction available to Super Express Deliveries for its previous payments to bicycle couriers is not affected by its failure to withhold.
Super Express Deliveries is still subject to penalties for its failure to withhold.
4. A deduction that would otherwise be denied under these amendments is maintained in the original income year if the taxpayer voluntarily notifies the Commissioner, in the approved form, of their mistake before the Commissioner commences an audit or other compliance activity.
Example 1.2 Voluntary notification (from the EM)
Caleb carries on a business as a mechanic. Caleb does not have any employees until he hires an apprentice, Bianca, in May 2020.
Caleb is not aware that he must withhold an amount from Bianca’s wages.
Caleb visits his accountant in September 2020 to prepare his 2019-20 income tax return. He mentions his expenditure to pay Bianca’s wages. Caleb’s accountant advises Caleb he should have been withholding from the wage payments.
Caleb notifies the Commissioner of his mistake. Caleb may still be subject to penalties for his failure to withhold. However, he is entitled to claim the deduction for the cost of Bianca’s wages in his 2019-20 income tax return.
So, from 1 July 2019 it will be very important to get your withholding correct. If you don’t withhold and you lose your deduction (for a company employer that would be an immediate 30% penalty, plus the normal withholding penalties).
What does this mean for paying a director’s salary in June where you know they have other deductions so that there will be no tax on this amount? Vary the withholding or withhold $1 or be ready to tell the Commissioner about it if he comes looking…