Payments to suppliers who don’t quote an ABN - Changes are coming...don't get caught out!

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***Changes are coming***

From 1st July 2019, any payments made to contractors (or any other suppliers for that matter), who do not quote an ABN and where the payer has not withheld tax under the “No ABN Withholding” requirements, will no longer be tax deductible.

This is a huge change and the impact can be significant to businesses who are unaware of the rules.

So lets cover some of the ABN basics (as the rules apply now) and then highlight what the situation will be when 1st July 2019 comes.

Believe it or not, there are still individuals and businesses carrying on a business or providing a service who issue invoices, and for whatever reason, fail to quote an ABN.  As business owners, we want to make sure we are doing the right thing by the tax man, but many businesses don’t realise what they are supposed to do when an invoices comes across their desk with no ABN.  

A supplier who has provided goods or services will issue a tax invoice and it should include their ABN (assuming none of the exceptions apply).  

If there is an exception and the individual or business is not required to quote an ABN, they should provide the payer with a document called “Statement by Supplier” and this document outlines why they are not quoting an ABN.  

Assuming there are no exceptions and the invoice still contains no ABN, the payer can ask the supplier for their ABN and ask them to reissue the invoice, including their ABN, prior to making payment.

If you have reason to suspect that the ABN might not be genuine or that it does not belong to the supplier who quoted it, you can check the ABN’s validity by using the Australian Business Register’s “ABN Lookup” (https://abr.business.gov.au/).  

If the ABN quoted on the invoice is not valid or the details do not match the supplier, you must withhold tax at the rate of 47% from the payment.

The payer is not required to check the validity of the ABN.  However, if the payer has reasonable grounds to believe that the supplier does not have an ABN or has quoted an ABN that does not belong to them, it is the payer’s responsibility to withhold.

If that’s the case, then the payer needs to take the following action:

1.    Deduct the top rate of tax from the payment (currently 47%)
2.    Report and pay the amount withheld to the ATO (If the payer is already a registered PAYG withholder, the amount will be lodged and paid with their Activity Statement or Business Activity Statement; if they aren’t registered...they need to be)
3.    Provide the supplier with a Payment Summary, at the time of payment, outlining the amount of tax withheld (this allows the supplier to claim a credit when they lodge their income tax return)
4.    Lodge PAYG annual report by 31st October each year

So I’ll do a quick recap with an example.  Assume your business engages John as a contractor and he issues an invoice for $1,000.  The invoice doesn’t have an ABN because he didn’t apply for one (so he has no valid exemption).  As the payer, it is your responsibility to withhold $470 and only pay John $530.  

The amount withheld of $470 is to be reported at W4 on the Activity Statement or BAS and the amount is included for payment to the ATO.  You also need to issue John with a “PAYG payment summary - withholding where ABN not quoted” form.

Unfortunately, the onus to withhold payment is on the payer (yes…more work for small businesses) and is designed to act as a deterrent to ensure that entities (especially those that are not required to be registered for GST), do not avoid their tax obligations.  

So what happens from 1st July 2019 I hear you asking?!  If the payer was required to withhold tax, but failed to lodge and remit, the entire payment made to the supplier becomes non-deductible to the payer.

Now is the perfect time for businesses to review their processes and procedures for supplier payments.  Do a “mini audit” and check that your suppliers are providing you with invoices and that they are quoting an ABN.  If they are not quoting an ABN and you are in a position where you are required to lodge and remit, make sure you do.  Don’t put your business in a position where you are penalised for not complying with the withholding rules!

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