The Australian Taxation Office (ATO) has reminded that certain ‘cash in hand’ payments to workers will not be tax deductible from 1 July 2019.
‘Cash in hand’ is a payment in cash to employees that does not comply with pay as you go (PAYG) withholding tax obligations and payments made to contractors who do not supply an Australian Business Number (ABN). Businesses that do not withhold any tax from these payments will not be able to claim tax deductions for these payments.
This change will be applied to payments made to workers from 1 July 2019 and will affect income tax returns lodged for the income year ending 30 June 2020.
Before 1 July 2019, businesses paying cash in hand to their employees or paying contractors without knowing their ABN can claim a tax deduction for these payments.
Under the new measure, employers who classify their employees as contractors by mistake will not lose their ability to claim tax deductions if these workers supply the employers with their ABN.
Employers not complying with their pay as you go reporting obligations have been warned by the ATO that they can be penalised for failing to withhold PAYG tax and report those amounts under the PAYG withholding tax system.
Employers that have failed to withhold tax or report their PAYG obligations can voluntarily disclose their default to the ATO before the ATO takes compliance action. This is always a much better course to take because the imposition of penalties (if any) will be substantially reduced. The ATO understands that employers make errors and assists employers that are prepared to rectify them. Your Nexia advisor is always ready to discuss any processing errors in meeting employer obligations.
The ATO reminds employers that PAYG withholding tax deducted from employees’ salaries is money held on trust by employers for the ATO. This is because the ATO gives credit for this tax when the employees lodge their income tax returns. Understandably therefore, the ATO has a high expectation that employers pay the PAYG withholding tax to the ATO. Penalties for non-payment of PAYG withholding tax are high with some employers being prosecuted in Court for serious breaches. A company that does not pay the PAYG withholding tax may be required to enter administration of liquidation.
This new measure regarding ‘cash in hand’ payments is a response to the activities of the Black Economy Taskforce, which estimates that the black economy is costing the Australian community around $50 billion in lost tax yearly or approximately three percent of Australian Gross Domestic Product (GDP).