Suspended deduction for wages expense
With all the attention on the recent election - and the aftermath - a new law coming into effect from this 1 July has not received the attention it deserves. As you would know, businesses are required to withhold tax from their employees’ wages and report it to the ATO. The gross wages is usually a deductible expense, even if the tax withheld has not yet been paid to the ATO.
As income tax is the government’s biggest source of revenue, it makes sense to incentivise businesses to not only withhold the tax from their employees’ wages, but to also report it to the ATO. Incentives tend to fall into either the “carrot” or “stick” categories. From 1 July, a business will be denied a deduction for gross wages until it reports to the ATO the relevant tax withheld. This new incentive obviously falls into the "stick" category.
Greater concern in play?
The textbook early indicator that a business is experiencing cashflow problems is failing to pay to the ATO their employee taxes withheld (along with net GST and other obligations reported on their activity statements) – it’s the easiest liability to not pay. That's often preceded by not reporting the withholding in the first place. So, on the one hand, the suspension of the deduction means a business that is already down on one knee will now have the other leg kicked out from under them, as they'll now have a higher income tax bill for the year. But on the other hand, it could well be a good thing – in a twisted kind of way. You see, this new law means we have to ask our clients a new question when completing their business’s 2019/20 tax return – Have you reported to the ATO the employee tax withheld and owing at 30 June? (Or, will it be reported by the due date to lodge the return?). If it has been reported (eg, on the Business Activity Statement, and it's been lodged), even if unpaid, the deduction is not denied. The key is having reported the withholding to the ATO.
In our experience, very few business owners fail to report to the ATO the employee tax withheld because of a disregard for their obligations. Sure, there will always be some less-than-scrupulous people out there, but for the vast majority, the reason is not that they don’t want to; it’s because they don’t have the money.
And that brings us to the real issue here – this new law may well raise to the surface much sooner the reality of a business experiencing cashflow problems. That is of far greater concern. As the trusted advisor, often clients seek our assistance early with an emerging problem. But not always. The point is that we want to help. We can analyse your cashflow patterns to identify the bottlenecks, such as debtor collection days blowing out, too much stock, the wrong mix of stock, or a deterioration in your cash-to-cash cycle. Or maybe you have a lazy balance sheet that’s ripe for a restructure of your capital funding to release cash. Or maybe you are pursuing the wrong sales strategy; one that is consuming cash, or sales are in a structural decline requiring a more fundamental rethink of the sustainability of your business model.
Prevention is better than a cure
Insolvency practitioners often lament how things could have turned out much better, had a business owner put their hand up for help sooner. Well, here's advance notice that next year - if we're not already aware - we're going to be asking that new question. And we'll be looking to help if the answer is not what we hope to hear. The point is to make changes before it's too late. For any business experiencing a cashflow predicament, the suspension of a deduction for wages expense is unwelcome, but is definitely the lesser concern.
It obviously wasn't intentional, but the cruelty of suspending a wages deduction for non-reporting, perhaps triggering an earlier reality check for a much greater concern, might just be doing a kind thing. In a twisted kind of way.