Closely Held Payees: STP Options for Small Employers
Small employers with closely held payees have been exempt from reporting these payees through single touch payroll (STP) for the 2019–2020 and 2020–2021 financial years. However, they must commence from 1 July 2021.
For these purposes, small employers are those with 19 or fewer employees. A closely held payee is an individual who is directly related to the entity from which they receive a payment. For example:
- family members of a family business;
- directors or shareholders of a company; and
- beneficiaries of a trust.
Small employers must continue to report information about all of their other employees (known as “arm’s length employees”) via STP on or before each pay day (the statutory due date). Those small employers which only have closely held employees are not required to start STP reporting until 1 July 2021, and there is no requirement to advise the ATO that a small employer only has closely held payees.
The ATO has now released details of the three options that small employers with closely held payees will have for STP reporting purposes from 1 July 2021.
Option 1: Report Actual Payments for Each Pay Event
Small employers can report actual payments to closely held payees through STP on or before the date of payment. In other words, whenever the small employer makes a payment to a closely held payee, they report the information on or before each pay event.
Option 2: Report Actual Payments Quarterly
Small employers can choose to report payments to any closely held payees on a quarterly basis. However, such employers must continue to report information about all of their other employees via STP on or before pay day.
This quarterly option does not change the due date for:
- notifying and paying PAYG withholding on activity statements; or
- making super guarantee (SG) contributions for any closely held payees.
Option 3: Report a Reasonable Estimate Quarterly
This reporting option allows small employers to report reasonable year-to-date amounts for their closely held payees quarterly. Not unexpectedly, there is more detail surrounding this option.
The ATO will remit any “failure to withhold” penalty a small employer may incur if it:
- reports year-to-date withholding amounts and tax withheld for a closely held payee that is equal to or greater than 25% of the payee’s total gross payments and tax withheld from the previous finalised payment summary annual report (PSAR) across each quarter of the current financial year in its quarterly STP reports; and
- reports and pays the tax withheld on time.
The ATO says it is important that small employers do not underestimate amounts reported for their closely held payees. If a review identifies that a small employer made payments to closely held payees equalling more than 25% of the entity’s total gross payments for the last financial year and did not report this through STP, the entity may:
- be liable for super guarantee charge and have to lodge SG contribution statements (if it did not make sufficient contributions during a quarter);
- not be able to deduct the payment for income tax; and
- be liable for penalties and interest.
Quarterly reporters have until the due date of their next quarterly STP report to correct a closely held payee’s year-to-date information.
If a closely held payee will not be included in a following quarterly STP report, the small employer must either:
- include them in its current quarterly STP report with corrected year to date amounts; or
- lodge an Update event by the relevant due date for quarterly activity statement with the corrected year to date amount for the payee.
Small employers with only closely held payees have up until the due date of the closely held payee’s individual income tax return to make a finalisation declaration for a closely held payee.
Small employers can make a finalisation declaration for a closely held payee at any time during the financial year (eg for closely held payees who have ceased employment). They must make a finalisation declaration for arm’s length employees by 14 July.
Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.