If you’re a small business, you know that Single Touch Payroll (or STP) is the new way for businesses to report tax and super information to the ATO.
As of 1 July 2019, all small business employers with more than four employees are now required to report through STP, as well as employers with 20 or more employees who should already be using this system.
This means that each pay run must be electronically filed with the ATO. Previously, you didn’t have to report wages and withholding until annual PAYG payment summaries were submitted. So this is a big change.
What Does This Mean For You?
If you’re unsure of why this change is happening in the ATO, you’re not alone. While the ATO tells us that STP is simply to make reporting easier, regular reporting means that annual PAYG payment summaries are no longer required.
So in a nutshell, STP means that the ATO now knows, on a live and up-to-date basis, whether an employer is making payments to employees compliantly.
The ATO is also changing deductibility rules for non-compliant payments (which they can now see in real-time).
Businesses will only be able to claim deductions for payments that are made to workers when the employer has complied with the PAYG withholding and other tax reporting obligations for that payment.
This presents a problem to many small businesses, as when you’re running at a smaller capacity, keeping 100% compliant all the time can fall by the wayside.
So if you’re only doing your super and tax deductible once a month, or even once a quarter, it’s time to rethink the way you work – and fast!
What Can Get You In Trouble With STP?
There are a lot of examples as to what small business owners are doing which have been perfectly fine in the past, but can now land you in hot water. These are just some examples, but tend to be the most common:
- Paying yourself a one-off directors fee at the end of the year to reduce a loan account to prevent Division 7A issues.
- Not withholding any tax at the required rates.
- Not paying super on the Director’s Fee, which is a breach of Super Guarantee Charge obligations.
Now that the ATO will know about the above on a live basis, the directors fees are not classified as wages and thus must be reported via STP. If taxes are not withheld correctly, then the income is still taxable for the director individually, but the expense is not deductible for the company – so it’s a double whammy! Not to mention that the ATO will now know about that super issue straight away.
- Not paying super on time – if super is paid late it becomes non-deductible (this means it must be paid within 28 days from the end of the quarter). But the Super Fund will still pay standard superfund tax rates on the funds, generally 15% but not always depending on members taxable income)
What Happens If You Do Get It Wrong
Getting your STP reporting wrong can mean that you’ll have to answer to the ATO and face potential fines and audits.
- Because reporting is now live and completely visible, you WILL be caught.
- You will lose deductibility in the company of the wage and super. Based on the average Director’s fee of $80k+Super, this means an average loss of $99k*30% lost deduction. So you could lose $26,500 cash to the ATO.
- The individual will still need to pay standard tax rates on income and superfund on super earnings despite the company losing deductions.
Getting onto the STP can be intimidating – particularly when you focus on the money that you could potentially lose if you get something wrong. But it doesn’t have to be a warzone. To give the ATO some credit, they are trying to make it easy, and it can even be integrated with certain cloud-based accounting systems like Xero! So once you’ve got STP set up and you get in the rhythm, it’ll become second nature.
But you have to have a thorough understanding of the changes to make sure you’re getting all that you can out of the system and not making any mistakes.
If you’re concerned that your small business might need some help running Single Touch Payroll, or you just want someone to double check what you have set up, call Bartley Partners today on (08) 8388 1033 or get in touch online to learn how we can help you.