Last year, new laws passed, introducing new legislation to deny an income tax deduction for certain payments if the associated withholding obligations have not been complied with.
Payments that are impacted includes salary, wages, commissions, bonuses or allowances to an employee; director’s fees; payments under a labour hire arrangement; payments to a religious practitioner; and payments for a supply of services.
The deduction is only denied where no amount has been withheld at all or no notification is made to the commissioner.
Speaking to Accountants Daily, Nexia national tax director David Montani said that while the new laws might seem harsh on businesses who are already struggling with cash flow to meet their obligations, it could help advisers uncover underlying issues sooner.
“The textbook early indicator that a business is experiencing cash flow problems is failing to pay to the ATO their employee taxes withheld – it’s the easiest liability to not pay. That’s often preceded by not reporting the withholding in the first place,” said Mr Montani.
“So, on the one hand, the suspension of the deduction means a business that is already down on one knee will now have the other leg kicked out from under them, as they’ll now have a higher income tax bill for the year. But on the other hand, it could well be a good thing – in a twisted kind of way.
“This new law means we have to ask our clients a new question when completing their business’s 2019-20 tax return: Have you reported to the ATO the employee tax withheld and owing at 30 June? If it has been reported, even if unpaid, the deduction is not denied. The key is having reported the withholding to the ATO,” he added.
“This could actually raise the issue of them experiencing cash flow problems sooner rather than later because in doing the business tax returns, this is going to be a question that has to be asked, and that could be a good thing because it gives you an opportunity to help.”
The new laws have also been previously flagged as an opportunity for businesses to review payments made to employees and contractors to ensure withholding obligations are being met.
Mr Montani believes the measure will ultimately be a good tool for accountants to take into their end of financial year discussions to identify emerging problems.
“It obviously wasn’t intentional, but the cruelty of suspending a wages deduction for non-reporting, perhaps triggering an earlier reality check for a much greater concern, might just be doing a kind thing,” he said.
“For any business experiencing a cash flow predicament, the suspension of a deduction for wages expense is unwelcome, but is definitely the lesser concern.”