Non-compliant withholders to be denied tax deductions
Royal assent has been given to the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018 during the week.
From 1 July 2019, businesses will no longer be able to claim a deduction for payments to their employees where they have not met their PAYG obligations. This includes where the employer is required to withhold PAYG from gross payments, but fail to report or remit it to the ATO. Importantly, the new legislation will deny a deduction for amounts paid to contractors if they are deemed to be employees. The payment is denied to the employer as an amount should have been withheld for PAYG under regular employee obligations.
This increases the risk to businesses who carelessly or inadvertently misclassify an employee as a contractor. The distinction between contractor and employee is often blurry so care must be taken. There is plenty of material on the ATO website to assist in clarifying the status of an individual: https://www.ato.gov.au/business/employee-or-contractor/ . Problems like this can sometimes be avoided by contracting entities such as companies, trusts and partnerships, rather than individuals.