By Ken Mansell
Let’s start with that fact that if employers have any arm’s length employees in addition to related employees, they must be reported on or before each payday under the normal STP rules. This has been the case for at least 12 months, possible all the way back to 1 July 2019. And let’s confirm that up to 30 June 2021, employers with 19 or fewer employees are exempt from reporting closely held payees through STP.
However, from 1 July 2021 these closely held payees will need to be reported through STP.
What is a "closely held payee"?
A closely held payee is an individual who is directly related to the entity from which they receive payments. These could include family members of a family business, directors or shareholders of a company, or beneficiaries of a trust.
From 1 July 2021, an employer can report payments to closely held payees through STP in one of three ways:
- Report actual payments on or before the date of payment: Whenever a payment is made to a closely held payee, the information should be reported on or before each pay event, just as it would be for any arm’s length employee.
- Report actual payments quarterly: Each quarter, when activity statements are due, report all payments made in that quarter on or before the due date for quarterly activity
- Report a reasonable estimate quarterly: To report a reasonable estimate quarterly, an employer must report year-to-date withholding amounts and tax withheld for a closely held payee that are equal to or greater than 25% of the payee’s total gross payments and tax withheld from the previous finalised payment summary annual report, across each quarter of the current financial year in quarterly STP reports.
Here is an example the Commissioner provides:
Jyla Pty Ltd chooses to start STP reporting for their closely held payee using the reasonable estimate method from 1 July 2021 (quarter 1 2021–22). They use a 25% estimate based on the payee’s last payment summary of $100,000 in the 2020–21 financial year.
Jyla Pty Ltd reports $25,000 each quarter for the first three quarters of the financial year. But when they get to quarter 4, they realise the payee will receive $120,000 for the year (not $100,000 as estimated). They choose to correct this in their quarter 4 STP pay event. They report $45,000 for this quarter to bring the year to date total up to $120,000.
They then report $30,000 each quarter in the 2022-23 year based on the $120,000 reported or the 2021-22 year.
Importantly, 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 final declaration for a closely held payee.
So, it looks like we all report under STP 25% of last year’s amount each quarter for our closely held employees, and before we lodge the employee’s return, we fix the STP amounts so, it equals the amounts shown in the return.
Failure to follow through on these reporting requirements can result in substantial penalties.
The penalty is calculated at the rate of $210 for each 28 days that a Single Touch Payroll report is overdue to a maximum of $1,050. This penalty is doubled for medium entities, and multiplied by five for large entities.
STP for closely held employees is going to be a nightmare for some time, but it is not going to go away if you ignore it.
So, what are you going to do for closely held payees after 30 June?
About Ken Mansell
Ken takes the label “tax nerd” as a badge of honour. He has worked for KPMG and Deloitte, as the tax counsel for ASX and NYSE listed entities, worked on tax policy for the Federal Government, as an advisor to the Assistant Treasurer, and on the secretariat of the Henry Review of Taxation. Ken runs “Tax Rambling” where he tries to share his love of tax with the rest of the world.