Types of payments affected
You can only claim a deduction for the following payments if you comply with the PAYG withholding and reporting requirements for that payment. These are payments:
- of salary, wages, commissions, bonuses or allowances to an employee
- of directors’ fees
- to a religious practitioner
- under a labour hire arrangement
- for a supply either wholly or partly of services where the independent contractor hasn't provided you with their Australian business number (ABN).
Non-cash benefits
A non-cash benefit is something you provide instead of paying cash, for example goods or services. In this case, you still need to report the PAYG withholding amount to us in order for this to be classified as a compliant payment and allow you to claim a deduction.
Correcting a mistake
If you withheld an incorrect amount by mistake or withheld the correct amount but made a mistake when reporting it to us, you won't lose your deduction. To minimise any penalties, you should still lodge a voluntary disclosure in the approved form as soon as possible.
Telling us about a failure to withhold or report
If you should have withheld a PAYG amount from a payment but you didn't withhold any of it, you will lose your deduction for that payment. That is unless you voluntarily tell us before we tell you we have started an audit or other compliance activity involving your PAYG withholding obligations or deduction claims. You can tell us by making a voluntary disclosure in the approved form.
If you withheld a PAYG amount from a payment but didn't report any of the amount to us, you will lose your deduction for the payment. That is unless you make a voluntary disclosure before we tell you we have commenced an audit or other compliance activity involving your PAYG withholding obligations or deduction claims. You can make your voluntary disclosure by reporting the amount to us via your activity statement or Single Touch Payroll (STP).
We may also charge you penalties for failing to withhold an amount from a payment or failing to report the amount to us.
How we tell you about an audit
There are different ways we can tell you that you have been selected for an audit or other compliance activity. We will usually phone you, or we may tell you in person or in writing. We will also tell you the scope of the audit and the period(s) under review.
Mistaking an employee for an independent contractor
There may be a situation where you make a mistake and treat the person working for you as an independent contractor when they are in fact your employee. As a result of your error, you obtain an invoice that quotes their Australian business number (ABN) and you don't withhold an amount from their payments.
In this instance, you won't lose your deduction for these payments if, at the time you thought they were an independent contractor, you complied with both of the following obligations:
- you obtained an invoice, or some other document relating to the payment that quoted the independent contractor's ABN
- you have no reasonable grounds to believe that it's not the independent contractor's ABN or that the ABN is not correct.
You can correct your mistake by lodging a voluntary disclosure in the approved form.
You can use our employee or independent contractor information pages help you work out if your worker is an employee or independent contractor.
Payments to independent contractors
You will not lose your deduction for a payment you make to an independent contractor for their services if both of the following apply:
- you have been given an invoice, or some other document that relates to the payment that quotes the independent contractor's ABN
- you have no reasonable grounds to believe that it's not the independent contractor's ABN or that the ABN is not correct.
It is always good business practice to check the ABN on the invoice and to check the independent contractor is registered for GST if they have charged GST.
Penalties
If you don't comply with your PAYG withholding and reporting obligations for a payment, you may:
- lose your deduction for that payment
- face existing penalties that apply for failure to withhold, and report amounts under the PAYG withholding system.