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PAYG withholding: New penalties for non-compliance

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New penalties for business’ pay-as-you-go (PAYG) withholding and reporting obligations will commence 1 July 2019. The new legislation will now prevent businesses from claiming deductions for payments to employees and certain contractors if they fail to comply.

Payments that are impacted include:

  • Salary
  • Wages
  • Commissions
  • Bonuses or allowances to an employee
  • Payment under a labour-hire arrangement
  • Payment to a religious practitioner
  • Payments for a supply of service

This measure highlights a key reason why governance over all employment tax is important. Specifically, the new laws will prevent an employer from claiming a deduction for payments to employees if they fail to withhold an amount from the payment as required under PAYG withholding rules or report a withholding amount to the ATO.

It is also necessary to understand the importance of lodging your business activity statement (BAS) on-time, as a failure to do so may result in a business permanently losing its tax deduction for wages paid under the new law.

Businesses will also have to take care to obtain a valid ABN from their suppliers and withhold at the top marginal rate if an ABN is not provided. A business that fails to comply with these rules will be denied a deduction if the payment relates to a contract for the supply of services. Contracts for goods and property are excluded from the operation of these new laws.

If you make a mistake by failing to withhold an amount or to report it and you voluntarily disclose this to the ATO before an audit or other compliance activity in regards to your tax affairs, your business will not lose its deduction. Taking early action to ensure your business is compliant to these updated PAYG withholding laws will make a difference to whether you remain eligible for deductions.

Determining whether GST is for business or private use

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The goods and services tax (GST) is applied to most goods and services sold in Australia, taxed at a rate of 10%. If you run a business, you are likely to have GST obligations such as claiming credit for any GST included in the price of goods and services that have been purchased for your business.

However, many businesses have expenses that are used privately as well as for business purposes. This means that a business must divide the GST on these costs between private and business use. The ATO allows an annual adjustment for these expenses when it comes to determining exactly how much something is used for business or private purposes.

Common types of purchases that can be made for both business and private use include:

  • Home office costs/home power use
  • Home telephone and internet costs
  • Motor vehicle purchases and running costs
  • Computers and other electronic devices

When a business pays for goods or services that can be used in business but also privately, the expenses must be apportioned to ensure that only the business part of the said expense is claimed. As this process can be extremely tricky, the ATO allows certain businesses to simplify the accounting for GST between the business and private use by making an annual apportionment election under Division 131 of A New Tax System (Goods and Services Tax) Act 1999. This means that a business can claim the full amount of GST on the payment that includes both the business and private use components during the financial year on the relevant business activity statements (BAS).

At the end of the financial year when the business’ income tax return is being finalised, adjustments can be made to account for the reduction in the GST amount for private use that can be claimed back. The adjustment will either increase the amount of GST that businesses are liable to pay or reduce the GST refund for the tax period the adjustment is made in.

Before selling your business

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Deciding to move on from your business can impact a lot of different people. When selling your business, you will need to consider the effects on all areas of operation from the actual transfer of ownership to the impact on day to day operations. While it is easy to get caught up in the price of a sale, you should take the time to reflect on what selling will really mean.

Before you commit to selling your business, ask yourself is this really what you want to do. Do you want to sell completely or would a smaller role in the company be an option? Whatever your reasons are for wanting to step away, you should take the time to think if selling really is the best option for you.

If you have decided that selling is the way you want to go, make sure everything is in the best possible condition for sale. Having all policies, contracts, finances and other relevant information well documented can help to transfer the business a lot smoother and quicker. This will also be appealing to potential buyers as they can look into all business dealings easily and make informed decisions.

Next, you should get a valuation of your business once all the elements are in order. Having a valuation done will help you decide on the right selling price. Getting professional advice for this process will help you get the most accurate figure for all your assets and a detailed look into the market value.

After all this, it is time to put your business on the market. Advertising will greatly help your sale and attract different types of buyers. For this reason, you should be strategic with your marketing, appealing to the buyers you want to sell to. While you have a had your business valued, negotiations will still be a big part of a sale. Prepare yourself with what elements of the sale you are willing to change and what elements are definitive, this will help to determine what negotiations are worth your time. Involving a professional business broker, settlement agent or lawyer in the sale of your business can help prevent problems and make sure the sale is valid.

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