All businesses, including not-for-profits, are now required to meet their PAYG withholding obligations before they can claim deductions for payments to workers – for example, salary, wages, bonuses, directors’ fees and payments under a labour hire agreement.
Payments to contractors where the contractor does not provide their ABN are also covered by these new rules.
Note! These new rules took effect from 1 July 2019 and apply to income tax returns lodged for the 2020 income year onwards.
What you must do to claim a deduction
In order to claim a deduction, you need to:
- withhold the required amount (if applicable) before you pay your worker
- report that amount to the ATO.
If you make a mistake and withhold or report an incorrect amount, you won’t lose your deduction. You will need to correct your mistake as soon as possible to minimise penalties.
Tip! If you are uncertain about the impact of these new rules, please speak with your tax adviser.
Using contractors – PAYG obligations
The ATO has published a useful checklist about your PAYG obligations if you hire a contractor.
If the contractor doesn’t provide you with their ABN:
- you generally need to withhold 47% from payments to them
- give a completed PAYG payment summary – withholding where ABN not quoted to the contractor with their net payment, or as soon as practicable afterwards
- include the payments in your PAYG withholding where ABN not quoted – annual report and lodge the report with the ATO by 31 October.
If the contractor is an individual who has a PAYG withholding voluntary agreement with you:
- work out the PAYG amount to withhold from payments to the contractor – use the tax withheld calculator or tax tables online (take into account any information provided by the contractor in a withholding variation or withholding declaration
- by 14 July, provide a PAYG payment summary – business and personal services income to the contractor showing the total amounts paid and withheld
- include the payments in your PAYG payment summary annual report and lodge the report with the ATO by 14 August.
If you have to withhold PAYG amounts for any reason:
- if you haven’t withheld before, you need to register for PAYG withholding straightaway
report and pay the PAYG withholding amounts to the ATO in your BAS which is usually quarterly or monthly for most businesses. A business withholding more than $1 million per year reports and pays more often.