Unreported ‘cash in hand’ payments are non-deductible from 1 July 2019
The Australian Taxation Office (ATO) reminded businesses that they would not be able to claim an income tax deduction for cash payments made to contractors or employees, where these payments were not being appropriately reported.
Any payment made to an employee should have a withheld amount to meet an employers’ Pay-as-you-go Withholding (PAYGW) obligations. The salary and wages along with the PAYGW reported to the ATO via Single Touch Payroll (STP) pay events and again on the Business Activity or Instalment Activity statements lodged monthly or quarterly.
A business making payments (cash or any other kind) to contractors must hold a valid Australian Business Number (ABN) for those contractors. If the contractor fails to supply a valid ABN then the business is required to withhold the highest marginal tax rate (currently 47%) from the payment and report then remit this payment to the ATO on the next BAS or IAS. Failure to withhold and report where no ABN is supplied means the payment made to the contractor will no longer be a tax deduction, even if it is a valid business transaction. Penalties may also apply for the failure to withhold and/or report, equivalent to the amount that was required to be withheld plus the business is required to pay the amount they failed to withhold. This means they are paying double the withholding requirement, and there is not tax deductibility for any of the payments made to the ATO or the contractor.
It is important to note that making cash payments to employees or contractors is acceptable, however, they must be reported for the income tax deduction to be allowed.
This change comes from recommendations made by the Black Economy Taskforce is just one of the initiatives to hold businesses accountable for complying with the law. You can read more about the initiative from the ATO here.