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Single Touch Payroll is Mandatory (even if you are your only employee)

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Insights From MCA Accountants

Single Touch Payroll is Mandatory (even if you are your only employee)

Action Points

All wages must be reported via Single Touch Payroll  from 1 July 2021 – and this includes payments to owners. If you do not have payroll software, now is the time to get it organised.

If you draw money out of your business, and have not spoken to your accountant about STP, then you should do so ASAP.

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WHAT IS SINGLE TOUCH PAYROLL?

Also known as “STP”, Single Touch Payroll is basically to process of wage payments being reported to the ATO every pay day.

In order to comply, businesses need to use payroll software that is compliant with the ATO’s requirements. Businesses that are using old versions of MYOB or QuickBooks need to upgrade, and businesses that don’t use any accounting software need to at the very least use payroll software.

PAYROLL SOFTWARE

Payroll software comes in different flavours – from stand alone, simple, and free; to complex software fully integrated with other aspects of your business. What software is right for you depends on your circumstances.

If your reading this article, it’s probably because you are a small / micro business simply needing to comply with the ATO’s requirements… in which case you have plenty of options.

If you currently use accounting software (such as Xero, QuickBooks Online, MYOB, Reckon, etc), then we suggest using payroll within your software. If the version you are using is outdated and does not comply with STP, then now is the time to assess whether you are using the accounting software best suited to your needs (i.e. don’t just upgrade, actually consider moving). We know that change is hard, but it can be worthwhile.

If you don’t have accounting software and just want payroll only software, then you should look at Xero, Payroller, and Reckon’s STP App. The last two are free offerings.

If you don’t have accounting software but are open to using it, have a read of our cloud accounting software brochure to see what benefits can be obtained from taking the plunge. You then would use the payroll module within your software.

ARE THERE ANY EXEMPTIONS?

Prior to July 2021, there were a few – the most notable being the exemption for business owners paying themselves. From 1 July 2021, most of these exemptions disappear and unless you have special circumstances you need to comply.

This means that all wages, regardless of who they are paid to, need to be reported to the ATO at the time payment is made.

WHAT ABOUT PAYMENTS TO MYSELF?

If you are a sole trader or operate as a partnership – you are safe. Technically you cannot employ yourself and money you draw out is simply “drawings” and not a wage.

If your business operates under a trust structure, then you need to work out if the amounts you pay yourself are “trust distributions” or “wages”. Each has its benefits and reasons to use the other one, such as:

  • As COVID showed us with JobKeeper and the Cash Flow Boost, Government support flows easier to business paying wages
  • Paying wages also means withholding tax, paying super, and paying (and being covered by) Workcover – whether you think this is good or bad is up to you
  • Some lenders look upon wages more favorably than trust distributions
  • Experience tells us that owners that don’t take a set wage each week treat their business like an ATM and typically end up short of cash
  • Wages have tax withheld, which means come year end most of your tax is paid. Distributions are still taxed, but often you get hit with a big lump sum payable at year end

If your business operates as a company, then payments to yourself can be wages, dividends, or drawings (better referred to as a loan). Again, pros and cons with each:

  • All of the points for trusts are relevant for companies
  • Dividends can have a tax credit attached to them (if the company has paid tax at the time the dividend is declared), but the business doesn’t get a tax deduction for dividends paid
  • Drawings from a company are actually a loan, and loans have strict conditions around interest and repayments. One strategy is to take loan payments and “repay” the loan via dividends in future years – experience tells us that this is rarely a tax effective way to do it

While drawings, dividends, and loans sound appealing (laregely due to the reduced admin requirements around wage reporting, superannuation, etc) – we find that businesses that pay their owners a reasonable wage topped up with dividends or distributions achieve the best outcome.

This means you need payroll software to report those wages…

FAQ

We’ve compiled a list of frequently asked questions to assist below:

Not anymore unfortunately…

Many business owners would just draw money out as needed through the year, with their accountant working out their wage at year end – the ATO have been clear that this is no longer an option.

If you draw money out during the year, you need to report it via STP. We suggest that your options (in order of best to worst) are:

  1. Move your remuneration to a set weekly pay (like any other business / employee relationship). Experience tells us that this will not only help comply with the ATO’s requirements, but give you a better idea as to how much money you spend
  2. Do monthly payruns where all of your drawings through the month are totaled with tax calculated
  3. Classify all of your drawings as “distribuitons” or “dividends” and hope that it all works out OK at year end (one problem for example is that if your company has not paid enough tax during the year, dividends cannot be “franked” dividends which essentially means you will pay extra tax on the dividends)

We probably don’t have an answer you’re going to like… It’s mandatory, like it or not. It doesn’t matter if:

  • You are the only person that works in your business
  • You only employ someone for 3 hours per week
  • You only employ someone for 2 weeks of the year
  • And so on.

 

Generally as long as you only pay wages quarterly… You must lodge each pay run when you pay your employees (including yourself).

There is a quarterly concession for amounts paid to related parties whereby a quarterly lodgement can be done, however:

  • You have to be able to demonstrate “exceptional circumstances” to the ATO
  • You still need to pay for payroll software to do the quarterly lodgement
  • It is a requirement that a tax agent (or BAS agent) lodges your BAS (which means you need to factor in the cost of paying someone to do those vs the time savings of not doing weekly STP)

Generally speaking, the best option is to simply do it weekly.

Yes we can, but it means we have to review your entire payroll – even if it’s just for one or two pay runs.

Accountants have been held liable by FairWork for underpayments by their clients where they process payroll. FairWork’s view on this is pretty much “the accountants have the resources to check it, so they must”. This means we need to check that your pays are in line with your award, that employees have the correct classification, and so on.

Imagine having a puncture and taking it to a mechanic to get fixed, obviously you only ask the mechanic to fix the tyre. Now imagine FairWork forcing the mechanic to perform a full safety inspection on the car just so they can change your tyre… That’s the situation we are in.

Essentially we can’t engage in a “lodge only” service where we just lodge the figures you provide (even as a one-off) – which means using us to lodge is probably going to be more expensive than you anticipate.

Our suggestion would be to use us for training and to show you how to do it yourself.

There are a few reasons why the Government introduced STP, including:

  • Real time reporting of current year earnings to employees
  • Increased visibility of superannuation accrued (to match against superannuation paid) to catch employers that don’t pay super
  • Improved BAS reporting (with wages figures automatically populated)
  • To generally reduce non-complicance with employment obligations

When you lodge your pay run with the ATO, pretty much what is on your employees pay slip is sent to the ATO. Not quite the same (for example the ATO are sent year to date figures as opposed to the figure for that pay run), but as a general idea that’s what the ATO will receive.

The ATO have specific requirements – but it’s all taken care of by your payroll software. The key is ensuring that you follow the setup procedure of your software.

If you report the wrong figure, an “adjustment event” can be lodged with the ATO to correct it.

No.

The benefit of STP is that come year end the ATO already know the amount of wages and tax each employee has. What you do need to do however is “finalise” the year – essentially telling the ATO that the figures reported are correct.

The ATO is going “digital by default”. Employers are submitting wages digitally, employees need to access their wage reports digitally, and MyGov is where employees go to find that information out.

Us tax agents also get access to those details when we do tax returns – so employees don’t need to provide us with a group certificate or any other report.

The short answer is you need to link a “Software ID” with your ATO account.

Your payroll software will have instructions on how to do this, but typically it will be a process of:

  • Head to the specific place in your payroll software to obtain your Software ID
  • Ensure that you are an authorised contact of the business with the ATO (generally directors and owners are automatically, but staff and bookkeepers/accounts need to be manually added)
  • Call the ATO and provide the software ID to them

Yes you can change at any time. When you change software you typically have to import the current payroll balances into your new software so that your software will report correct year to date figures. Your new software will have instructions on what to do.

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