The ATO has reminded employers that any ‘cash in hand’ payments made to workers will not be tax deductible. ‘Cash in hand’ refers to cash payments to employees that do not comply with pay as you go ('PAYG') withholding obligations. For example: failing to assess that the employee has the right to work in Australia, not providing a TFN declaration, or failing to withhold tax.
Each employee should complete a Tax file number declaration for you to work out the amount to withhold from their payment. If the employee fails to report a valid TFN or provides an invalid one, you must withhold the maximum rate plus Medicare levy. That equates to 47.5% from every payment.
The same applies to payments made to contractors, subcontractors, and suppliers, where the entity or individual does not provide an ABN (or provides a false ABN) and the business does not withhold any tax (47.5%), the payment is not tax deductible. You should check that the ABN your supplier's quote is both valid and active. You can make sure of that by doing a quick check in the ABR look up: https://abr.business.gov.au/. These payments will also not be tax deductible.
There are some payments that do not require businesses to withhold regardless of whether an ABN is provided or not:
- Total payment is $75.00 or less.
- Not a business transaction – selling a second-hand computer that has only been used at home for private purposes.
- Entire payment is exempt income for the supplier – charities or religious institutions.
- Contractor is under 18 and the payment is less than $350 a week.
The ATO started this measure for payments made to workers in the 2020 Financial Year and now that the due date for most business lodgements (17 May) has passed, it will be the focus of the ATO as a recommendation from the Black Economy Taskforce.
In addition to the loss of a tax deduction, businesses caught not complying with their PAYG withholding obligations may be penalised for failing to withhold and report amounts under the PAYG withholding system. And in case you were asking, no, fines and penalties are also not tax deductible.
Where businesses that mistakenly classify employees as contractors will not lose their deduction where their worker provides them with an ABN.
If you are unsure what you need to do, please contact us today.