A new law coming into effect from 1 July has not received much attention. Businesses are required to withhold tax from their employees’ wages and report that withholding to the ATO – this is called PAYG withholding tax. The gross wages are usually tax deductible, even if the tax withheld has not yet been paid to the ATO.
Because income tax is the government’s biggest source of revenue, from 1 July businesses will be denied a tax deduction for wages until those wages and the relevant tax withheld are reported to the ATO.
Greater concern in play?
The textbook early indicator that a business is experiencing cashflow problems is failing to pay to the ATO their PAYG withholding tax (along with net GST and other obligations reported on business activity statements (BASs). That’s often preceded by not reporting the withholding in the first place.
This new law means we have to ask our clients a new question when completing their business’s 2019/20 tax return – Have you reported to the ATO wages and PAYG withholding tax? (Or, will those details be reported by the due date to lodge the return? If wages and PAYG withholding tax have been reported – e.g. on a BAS lodged with the ATO) – even if unpaid, the tax deduction for wages is not denied. The key is having reported the withholding tax to the ATO.
In our experience, very few business owners fail to report to the ATO the PAYG withholding tax because of a disregard for their obligations. Sure, there will always be some less-than-scrupulous people out there, but for the vast majority, the reason for not reporting is not that they don’t want to but because they don’t have the money to pay to the ATO.
And that brings us to the real issue here – this new law may well raise to the surface much sooner the reality of a business experiencing cashflow problems. That is of far greater concern. As the trusted advisor, often clients seek our assistance early with an emerging problem. But not always. The point is that we want to help. We can analyse your cashflow patterns to identify the bottlenecks, such as debtor collection days blowing out, too much stock, the wrong mix of stock, or a deterioration in your cash-to-cash cycle. Or maybe you have a lazy balance sheet that’s ripe for a restructure of your capital funding to release cash. Or maybe you are pursuing the wrong sales strategy; one that is consuming cash, or sales are in a structural decline requiring a more fundamental rethink of the sustainability of your business model.
Prevention is better than a cure
Insolvency practitioners often lament how things could have turned out much better, had a business owner put their hand up for help sooner. Well, here’s advance notice that next year – if we’re not already aware – we will be asking that new question. And we will be looking to help if the answer is not what we hope to hear. The point is to make changes before it’s too late. For any business experiencing a cashflow predicament, the suspension of a tax deduction for wages is unwelcome and costly, but is definitely the lesser concern.
While not intentional, by this new law suspending a wages tax deduction for non-reporting of wages and PAYG withholding tax to the ATO, may have a positive outcome for businesses struggling with cashflow issues. Remember, we are ready to help overcome such issues.