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Business owners: Are you at risk from ATO changes to tax deductible business expenses?

Article By Jeff Little | | Accounting & Tax

While franking credit refunds and deductions for rental losses hit the headlines in an election year, new legislation creating the single biggest compliance risk for every business owner has gone largely unreported.

From 1 July 2019, some regulations for tax deductible business expenses changed. Unless you’re aware of what these changes mean, you could get caught out.

We clear it all up here, so you know where you and your business stand.

Tax deductible business expenses: What are the key changes?

From 1 July 2019, the changes mean that any business (including those deriving personal services income) that makes payments to owners, employees and contractors will be disallowed a deduction where tax withholding and reporting obligations are not met.

Non-compliance will result in you paying twice the amount of income tax on the total value of these wage and contractor payments, with penalties and interest on top of that.

This is a compliance risk big enough to push a business into insolvency.

Therefore, it pays to get your business fully up to date with how you can avoid such penalties….

What is meant by “payments”?

With the new legislation, “payments” include:

  • Employee and director salaries, wages, commissions, bonuses or allowances;
  • Director fees;
  • Payments under a labour hire arrangement;
  • Contractor payments where the ABN is not provided.

While most business owners are compliant in calculating and paying employee wages and PAYG withholding, some do not extend the same strict approach to their own wages.

In addition, personal service income earners also have a PAYG withholding requirement on the net profit of their business that they haven’t withdrawn.

Are you at risk from the new legislation?

So who’s most at risk of getting caught out with these changes in legislation to tax deductible business expenses?

This includes business owners who:

  • Are not recording and paying wages and withholding tax through normal payroll;
  • Take cash drawings or “dividends” through the year and let their accountants calculate a wage during tax planning or before lodgement of the tax return;
  • Are personal services income earners, who do not correctly report PAYG withholding on wages and net profit;
  • Are not utilising payroll software: this eliminates the risks of manual payroll calculation errors and ensures Single Touch Payroll (STP) reporting obligations can easily be met;
  • Don’t lodge activity statements to report wages and PAYG withholding;
  • Do not withhold tax on payments to contractors who don’t provide a correct ABN.

How do you protect your business?

Fortunately, there are some simple actions you can take to shield your business from the risk of penalties for errors with tax deductible business expenses:

  • Firstly, don’t ignore this: non-compliance is expensive so review your payroll process and seek guidance from your adviser;
  • Set up a compliant payroll system to automatically calculate PAYGW and to meet STP requirements;
  • Establish a process for checking ABNs supplied by contractors and withhold tax if required;
  • Lodge your activity statements on time;
  • Prepare a budget to determine affordable owner payments and PAYG withholding;
  • Prepare a cashflow projection to ensure ATO payments are planned for.

Need help now?

If you need to ensure compliance for your business as a matter of urgency, contact us .

We can review your payroll calculations and processes to advise on improvements, take care of monthly or quarterly ATO lodgements and run your payroll function as part of a comprehensive accounts administration solution.