All businesses, including not-for-profits, are now required to meet their PAYG withholding obligations before they can claim deductions for payments to workers – for example, salary, wages, bonuses, directors’ fees and payments under a labour hire agreement.
Payments to contractors where the contractor does not provide their ABN are also covered by these new rules.
Note! These new rules took effect from 1 July 2019 and apply to income tax returns lodged for the 2020 income year onwards.
What you must do to claim a deduction
In order to claim a deduction, you need to:
- withhold the required amount (if applicable) before you pay your worker
- report that amount to the ATO.
If you make a mistake and withhold or report an incorrect amount, you won’t lose your deduction. You will need to correct your mistake as soon as possible to minimise penalties.
Tip! If you are uncertain about the impact of these new rules, please speak with your tax adviser.
Using contractors – PAYG obligations
The ATO has published a useful checklist about your PAYG obligations if you hire a contractor.
If the contractor doesn’t provide you with their ABN:
- you generally need to withhold 47% from payments to them
- give a completed PAYG payment summary – withholding where ABN not quoted to the contractor with their net payment, or as soon as practicable afterwards
- include the payments in your PAYG withholding where ABN not quoted – annual report and lodge the report with the ATO by 31 October.
If the contractor is an individual who has a PAYG withholding voluntary agreement with you:
- work out the PAYG amount to withhold from payments to the contractor – use the tax withheld calculator or tax tables online (take into account any information provided by the contractor in a withholding variation or withholding declaration
- by 14 July, provide a PAYG payment summary – business and personal services income to the contractor showing the total amounts paid and withheld
- include the payments in your PAYG payment summary annual report and lodge the report with the ATO by 14 August.
If you have to withhold PAYG amounts for any reason:
- if you haven’t withheld before, you need to register for PAYG withholding straightaway
- report and pay the PAYG withholding amounts to the ATO in your BAS which is usually quarterly or monthly for most businesses. A business withholding more than $1 million per year reports and pays more often.
Withholding for employee shares
Does your company have an employee share scheme (ESS)? If it does, you will have withholding obligations.
When does withholding apply?
Withholding will apply if:
- you provide a discounted ESS interest to your employee
- that employee has not given you their TFN or ABN by the end of the relevant income year – so there is no withholding if your employee has provided their TFN.
If your employee has given you a TFN declaration for their employment, no withholding is payable.
How is withholding calculated?
Withholding is calculated on the discount your employee should include in their assessable income under the ESS rules.
If you have engaged the services of a third party to administer your ESS, you may give them your employee’s TFN. In these circumstances, no withholding is payable.
The rate of withholding is the highest individual marginal tax rate plus the Medicare levy, i.e 47% for the current tax year. Under no circumstances can you withhold in excess of this rate.
Pay the amounts withheld
You must pay amounts you withheld to the ATO within 21 days after the end of the income year your employee is taxed on the discount.
If you pay amounts withheld to the ATO, you can recover these amounts from your employee. You can do this by offsetting the amount of withholding paid against any amount you owe to your employee, such as salary and wage income.
Read our complete November 2019 Taxwise Business Newsletter here