The Australian Taxation Office (ATO) has reminded employers that any ‘cash in hand’ payments made to workers from 1 July 2019 will not be tax deductible.
‘Cash in hand’ refers to cash payments to employees that do not comply with pay as you go (PAYG) withholding obligations.
Payments made to contractors where the contractor does not provide an ABN and the business does not withhold any tax will also not be tax deductible from 1 July 2019.
Assistant Commissioner Peter Holt said the new rules have a dual purpose of levelling the playing field for honest businesses that are doing the right thing by their workers as well as tackling the black economy.
“It’s fairly straight-forward: do the right thing and you can claim a deduction. Deliberately do the wrong thing and you’ll miss out on a deduction and risk being penalised”, Mr Holt said.
Taking effect for payments made to workers from 1 July 2019 for income tax returns lodged for the 2020 income year onwards, this is part of the government’s response to recommendations from the Black Economy Taskforce.
“The Black Economy Taskforce estimates that the black economy is costing the community as much as $50 billion, which is approximately three percent of Gross Domestic Product (GDP). This is money that the community is missing out on for vital public services like schools and roads.” Mr Holt said.”
Businesses that operate in the black economy are undercutting competitors and gaining a competitive advantage by not competing on an even footing.
In addition to the loss of a tax deduction, employers caught not complying with their PAYG withholding obligations may be penalised for failing to withhold and report amounts under the PAYG withholding system.
Mr Holt said “transacting in cash is a legitimate way of doing business, and we recognise that some industries do tend to take more cash than others”.
“But when cash is used to deliberately hide income to avoid paying the correct amount of tax or superannuation it’s not only unfair, it’s illegal”, Mr Holt said.
Employers who mistakenly classify their employee as a contractor will not lose their deduction where their worker provides them with an ABN.
Mr Holt said that payers who attempt to do the right thing but make a mistake do not need to worry; they will not lose their deduction. “Our objective is to support small business to help them get it right. But anyone caught deliberately doing the wrong thing will lose their deduction”.
Mr Holt said that employers that failed to withhold or report their PAYG obligations can come forward and voluntarily disclose this to the ATO before we take any compliance action. If they do they will not lose their deduction and may be entitled to reduced penalties.
This article was first published in The Fence magazine.