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When are Employee Wages and Super Contributions Non-Deductible?

Article By Mitchell Riley | | Accounting & Tax

Running a successful business in Australia requires meticulous attention to detail, especially when it comes to payroll and superannuation obligations. Australian tax laws mandate that businesses withhold sufficient income tax from wages and contribute to their employees’ super funds on time. Failure to comply with these requirements can lead to non-deductible wages and super. In this article, we’ll delve into these concepts, their implications, and provide valuable insights for employers.

Under withholding tax on wages

As an employer, understanding the implications of under withholding tax on wages is crucial:

Reduced Tax Deductions: When the correct amount of tax withholding is not deducted from wages in a payrun, the business loses the ability to claim these wages as a tax-deductible expense. This leads to a higher taxable income for the business, resulting in an increased tax liability.

Financial Strain: Non-deductible wages leads to additional tax liabilities, ATO interest and penalties that weren’t anticipated by a business, causing significantly impact cash flow and profitability.

Compliance Issues: Non-compliance with tax laws can lead to audits and investigations by the Australian Taxation Office (ATO). In addition to tarnishing a business’ reputation and potential legal consequences, the costs involved in seeking the assistance of an accountant in the event of an audit can quickly add up.

To prevent non-deductible wages, employers should take the following steps:

Utilize Modern Payroll Software: Implement payroll software (e.g., Xero) that automates tax calculations ensuring the correct minimum withholding amount is met for each employee, including the businessowner.

Accurate Record Keeping: Maintain accurate records of all employees’ details and an up-to-date tax file number declaration.

Regular Payroll Audits: Conduct regular internal audits of your payroll process and systems to ensure continuous accurate withholding of income tax.

Late payment of super

By law, employer super contributions are required to be paid no later than 28 days after each quarter (e.g., 28 October, 28 January, 28 April & 28 July). The repercussions of late payment of super are significant:

Loss of Tax Benefits: Timely super contributions are tax-deductible for businesses. Failure to make these contributions on time results in losing this tax deduction.

Financial consequences: In addition to the interest payable to employees’ super funds because of late payment, the ATO has the discretion to impose penalties and additional general interest charges and administrative fines.

Employee Discontent: Late super payments can erode employee trust and satisfaction, potentially leading to low morale and higher turnover rates.

To avoid non-deductible super issues, consider the following strategies:

Automated Payments: Use automated systems to make regular super contributions, reducing the risk of late payments.

Increase payment frequency: Rather than paying super on a quarterly basis which can lead to an entire quarter’s super being non-deductible if paid late, consider paying super on a weekly or monthly basis; this way, in the event of a scheduled super payment being made later than anticipated, you may only lose out on a week or months’ worth of deductible super.

Cash Flow Planning: Incorporate super payments into your cash flow planning to ensure you always have the necessary funds available.

Regular Reconciliation: Reconcile super payments regularly to identify any discrepancies and rectify them promptly.

For Australian employers, understanding the implications of under withholding on wages and late super payments is essential for maintaining financial health and compliance with tax laws. By prioritizing accurate record keeping, implementing modern payroll software, and automating payment processes, businesses can prevent these issues from arising. Remember, proactive measures not only ensure tax deductions and compliance but ensures positive employee relations.

Take charge of your business’s financial health and contact your Altitude Adviser to implement these strategies today.