Non-Deductibility due to failing to withhold

Since 1 July 2019 many small business are becoming surprised to learn that "cashies" are a huge tax problem. This can affect casual paid workers paid under the table and even notional "Directors fees"

The tax rules deny tax deductions for payments to workers unless withholding tax laws have been applied. This doesnt mean withholding MUST occur. It just means the payments need to be reported and if required, tax is withheld. So the employer / payer needs a TFN declaration for and may even now need to implement single touch payroll. For the 2020 and 2021 year some may be exempted from STP...But its coming... Paying cash and not reporting the wages paid means NO deduction.

Removing tax deductibility of non-compliant payments

This expands on a similiar rule for interest and royalties paid to a non-resident. And the assessment of tax to the trustee (s99 & s99A) where a non-resident is made entitled to trust income including some capital gains. Its not uncommon to find a non-resident trust beneficiary paid the full entitlement when they shoudl only be paid the amount of the net entitlement,

This problem also ripples into contractors. (who are sole traders). Important that the correct process is followed:

Mistaking an employee for a contractor
There may be a situation where you make a mistake and treat the person working for you as a contractor when they are in fact your employee. As a result of your error, you obtain an invoice that quotes their Australian business number (ABN) and you don't withhold an amount from their payments.

In this instance, you won't lose your deduction for these payments if, at the time you thought they were a contractor, you complied with both of the following obligations:

• you obtained an invoice, or some other document relating to the payment that quoted the contractor's ABN
• you have no reasonable grounds to believe that it's not the contractor's ABN or that the ABN is not correct.