From 1 July 2019, the rules for claiming deductions for payments to employees and contractors are changing. You can only claim deductions for payments made to employees and contractors where you have met the pay as you go (PAYG) withholding obligation for that payment.

So what are your obligations?

Where the PAYG withholding rules require an amount to be withheld from wages or contractor payments, you must:

• withhold the amount from the payment before you pay the worker
• report that amount to the ATO

With contractors, it is your responsibility to ensure that the contractor has provided a valid ABN on their invoice. If the contractor fails to provide a valid ABN and the invoice exceeds $75 excluding GST, you must withhold 47% from the payment and remit that amount to the ATO in order for your payment to the contractor to be tax deductible.

With wages paid to any employees, you won’t lose your deduction if you withhold:

• An incorrect amount by mistake – to minimise any penalties you can correct your mistake by lodging a voluntary disclosure in the approved form.
• The correct amount but make a mistake when reporting – you should correct the mistake as soon as possible.

If you fall foul of these new provisions and are denied a deduction for the payment to the employee or contractor, this will increase your profit and subsequently your tax.

So best practice is to essentially ensure:

• You are deducting the right amount of PAYG from wages paid and reporting that to the ATO within the due dates. If you currently abide by this practice, then there is no concern.
• You are checking that all your contractors are providing a valid ABN, and if they are not, deduct 47% from their payment and report/remit this sum to the ATO.