No Withholding Equals No Tax Deduction
Recently the government introduced measures regarding withholding tax that has the potential to affect any business.
The new legislation denies a tax deduction to the payer where they have a withholding obligation that has not been met. Commonly this will affect salaries, wages, commissions, bonuses or allowances to an employee, directors fees and payments for a supply of services.
Most people know there withholding obligations for payments to employees, however it will be more important than ever to make sure you are correctly dealing with the amount of tax being withheld. This is by no means an easy area to navigate. Some allowances need to have tax withheld for instance, whereas others do not. Directors fees are subject to withholding just like any other wages. There are many things that could go wrong, and often do.
Some employees may ask you to reduce the amount of tax that is being withheld from their wages. You as an employer cannot do that unless they have applied to the Australian Taxation Office (ATO) and been approved to have a varied rate of withholding. It is your responsibility as the employer to make sure the correct amount of tax is withheld and all the potential penalties rest with you.
Withholding for the supply of services is an area where there is significant non compliance with the existing laws. There are already penalties where you fail to withhold an amount, this new legislation will just make it worse. If you are paying a contractor who supplied services to your business, it is up to you as the payer to check that they have quoted their ABN, if not you should withhold tax from the payment at the top marginal tax rate and forward this to the ATO. If you don’t check and you don’t withhold then you will be denied a tax deduction for the entire amount of the payment, not just the amount you should have withheld.
It will put even more pressure on the age old contractor v employee decision. If you have incorrectly assessed that someone supplying services to your business is a contractor, when the ATO believes they are an employee, on top of the current penalties for unpaid superannuation and PAYG withholding, you now also risk not being able to claim a tax deduction.
The theme of the legislation is that it is all beholden upon the payer. The payer is the one with all the potential penalties so they must take extra care when making payments.
If you need clarification on withholding tax, please contact the PRA Accounting team. Tel: 5221 7655