Small business owners who make off-the-books payments to workers will no longer be able to deduct those payments as of 1 July.

The ATO has reminded employers that payments that don’t comply with PAYG withholding obligations will stop being tax-deductible. This includes:

  • Cash-in-hand payments
  • Payments to contractors where the contractor doesn’t provide an ABN

ATO assistant commissioner Peter Holt said the new rules would not only combat the black economy but also support honest small businesses that are playing by the rules.

“It’s fairly straight-forward: do the right thing and you can claim a deduction. Deliberately do the wrong thing and you’ll miss out on a deduction and risk being penalised,” he said.

“Businesses that operate in the black economy are undercutting competitors and gaining a competitive advantage by not competing on an even footing.”

This new measure will take effect for payments made to workers from 1 July 2019 for income tax returns lodged for the 2020 income year onwards.

It is part of the government’s response to recommendations from the Black Economy Taskforce, which includes the ATO, the Treasury, the Fair Work ombudsman and other federal agencies.

Mr Holt said that while transacting in cash is a legitimate way of doing business, it is illegal for small businesses to use cash transactions to conceal their real income.

Small businesses that mistakenly classify employees as contractors will not lose their deduction where their worker provides them with an ABN, according to Mr Holt.

“Our objective is to support small business to help them get it right. But anyone caught deliberately doing the wrong thing will lose their deduction.”