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No Tax Deduction for Employee Payments for Non-Complaint PAYG Withholders

No Tax Deduction for Employee Payments for Non-Complaint PAYG Withholders 1

Businesses will be denied tax deductions for payments to their employees and contractors if they fail to comply with PAYG withholding obligations.

This is a part of Black Economy Tax Measures intended to create financial disincentive to make payments to those operating in black economy.

Who will be affected?


Under PAYG Withholding regime, employers must withhold PAYG amounts from certain payments for work and services and must report and pay these amounts to the Commissioner (including NIL amounts).

These payments include:

 – Employee salaries and wages

 – Payments of director fees

 – Payments made by labour hire firms

 – Payments of non-cash benefits that would otherwise be subject to withholding if paid in cash.

Entities paying contractors for services

Entities must withhold an amount from payments to another entity where ABN is not quoted (no ABN Withholding Rule) for supply of services. It must also report and pay these amounts to the Commissioner. This requirement does not apply to supply of goods.

What the change is about?

Under the current law, businesses are generally eligible to claim tax deduction for payments made to employees and suppliers. Under the new law, deductions will be denied if:

 – PAYG withholding is not made

 – Entity fails to notify the Commissioner

If the amount of PAYG withholding for the period is NIL, entity must still report it as NIL to avoid deduction being denied.


1. Deduction will only be denied if no amount is withheld AT ALL. If incorrect amount of is withheld, it will not affect eligibility for deduction. Payers have an opportunity to correct errors made in respect of PAYG withholdings.

2. Deductions will not be denied for payments made to an employee if the payer honestly believes the employee is acting as a contractor who is not a subject to PAYG regime.

3. Deduction is maintained if the payer voluntarily notifies the Commissioner of their mistake in the approved form before ATO commences an audit or other inquiry.

Please note, even if deduction is not denied, the payer will still be subject to penalties for failure to withhold.

Date of Effect

The measure will apply to payments made on or after 1 July 2019.

The Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018 is currently before the Parliament and will become law on the first day of the quarter following Royal Assent.

Disclaimer: All the information provided on this website is of general nature and does not constitute tax, legal or financial advice. It does not take into account your personal circumstances and is not intended to replace consultation with a qualified professional.

Posted in Small Business, Tax News & Updates

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