Under Australian law businesses must withhold Pay As You Go (PAYG) from payments:

1. To employees of salary, wages, commissions, bonuses or allowances
2. Of director fees
3. To religious practitioners
4. Under labour hire agreements
5. To suppliers that don’t provide an ABN.

Businesses making these payments are also required to:

1. Register for PAYG withholding with the Australian Taxation Office (ATO)
2. Report on PAYG withheld in the appropriate monthly Instalment Activity Statement quarterly Business Activity Statement and pay the corresponding amounts to the ATO
3. Lodge an annual PAYG payment summary report.

Previously the ATO has treated non compliance with financial penalties issued to the non-complying entity. In the case of a company, as directors are legally responsible for their company to meet it’s PAYG obligations, directors become personally liable for a penalty equal to the unpaid amount if PAYG withholding obligations are not met in full by the company on or before the relevant due date.

Now, the ATO has added another incentive for PAYG compliance. From 1 July, businesses that fail to comply lose the ability to claim the corresponding payments as a tax deduction. For example – you might have wages/salaries for the quarter of $30,000. The amount of $30,000 can no longer be deducted as a business expense on your tax return, meaning you will have a higher taxable income for the year. This could cost a company an extra $8,250 to $9,000 in tax.

The one exception from this is that if you realise there is a mistake and voluntarily correct it before the ATO notices the omission. For example, you pick up that a payment was made as if to a contractor and when it should have been treated as a payment to an employee, in which case PAYG would have been withheld. In that scenario, you might still be issued a penalty for not withholding PAYG, but the actual payment you may still be able to claim as a business expense on your tax return.

If you have any questions about this new measure or your PAYG withholding obligations please call our office on 03 5339 3200 or contact us here.

Thanks for reading.

By Genna Kidd

The information contained on this website has been provided as general advice only.  The contents have been prepared without taking account of your personal objectives, financial situation or needs.  You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.