The expansion of STP reporting to include closely held payees heralds new reporting obligations for some employers. This article considers how the new reporting requirements will affect employers with closely held payees.
Single Touch Payroll — closely held payees
An exemption that relieved small employers (those with 19 or fewer employees) from having to report payments made to closely held payees through Single Touch Payroll (STP) expires on 30 June 2021. This means that, from 1 July 2021, small employers will need to start reporting their closely held payees through STP.
Under STP reporting, employers are required to report their employees’ payroll information to the ATO each time they are paid through an STP-enabled digital solution.
Payroll information includes:
- salaries and wages;
- Pay as you go withholding (PAYGW); and
- Superannuation Guarantee (SG).
A closely held payee is an individual who is directly related to the entity from which they receive payments, for example:
- family members of a family business;
- directors or shareholders of a company;
- beneficiaries of a trust.
All other employees are arm’s length employees.
STP reporting options for employers of closely held payees
From 1 July 2021, small employers have three options to report through STP payments to their closely held payees that give rise to a PAYG withholding (PAYGW) obligation, such as the payment of salary and wages, allowances and director’s fees.
Option 1: Report actual payments each pay day
The employer reports actual payments made to their closely held payees on or before each pay day. This option is more suitable for employers who regularly pay salary and wages, allowances or director’s fees to their closely held payees as the amount is known and there is a pattern of payments. Where the employer also has arm’s length employees, it may be reasonably straight-forward to report the closely held payees along with the arm’s length employees by each pay day.
Option 2: Report actual payments quarterly
The employer reports actual payments made in a quarter to their closely held payees by the date on which the activity statement is due. This option is more suitable for employers who pay salary and wages, allowances or director’s fees to their closely held payees but only wish to report though STP on a quarterly basis.
Option 3: Report a reasonable estimate quarterly
The employer reports a reasonable estimate of the total amounts expected to be paid to closely held payees, across each quarter, by the date on which the activity statement is due. This option is more suitable for employers who may not know the exact or actual amount of payments made to closely held payees each quarter, and prefer to report quarterly using a reasonable estimate of the total amounts expected to be paid.
Employers who choose to report quarterly will need to lodge their STP report by the due date of their quarterly business activity statement (BAS). If the employer lodges a monthly activity statement to report PAYGW or GST, the STP report is due at the same time as the activity statement for the last month of each quarter, i.e. September, December, March and June. The due date of the STP report will always align with the due date of the BAS, inclusive of any extended lodgment concessions which may apply to the employer’s circumstances.
Choosing to report actual payments made to closely held payees each quarter does not change the due date for:
- notifying PAYGW as usual on the activity statement and paying by the usual due date; and
- making SG contributions for closely held payees (by the 28th day following the end of the quarter).
There are several factors that employers need to consider when reporting payments made to their closely held payees including:
- How an employer makes a reasonable estimate of year-to-date (YTD) amounts under Option 3;
- What happens if the YTD amount is adjusted prior to being finalised; and
- How the superannuation guarantee comes into play.
Adjustments can be made to the YTD amount reported prior to finalisation. The ATO will not impose any PAYGW failure to withhold penalty for adjustments made prior to finalisation provided the employer reports a reasonable estimate of YTD amounts in their quarterly STP reports and reports and pays the PAYGW amount on time.
The making of a reasonable estimate under Option 3 of itself does not constitute ordinary time earnings for SG purposes, but if this amount is later confirmed to be the remuneration, it will be subject to SG. This could give rise to a SG charge liability in the event the employer has an SG shortfall.
After the end of each financial year, the STP data reported during the year is finalised. When the employer makes a finalisation declaration, this relieves the employers from having to issue payment summaries or lodge a PSAR where amounts are reported through STP.
An employer must make an annual finalisation declaration by:
- 14 July for any arm’s length employees;
- 30 September for closely held payees if the employer also has arm’s length employees; and
- the due date of lodgment of the closely held payee’s individual income tax return if the employer only has closely held payees and is a small employer.
Robyn Jacobson, senior advocate, The Tax Institute