From 1 July 2019 businesses can only claim deductions for payments made to workers (employees or contractors) where you have complied with the pay as you go (PAYG) withholding and reporting obligations for that payment.
If the PAYG withholding rules require you to withhold an amount from a payment you make to a worker, you must:
withhold the amount from the payment before you pay it to them; and
report the amount to the ATO
Any payments made to a worker where the business hasn't withheld or reported the PAYG amounts are defined by the ATO as non-compliant payments. Businesses are unable to claim a deduction if you are required to withhold an amount and you don't withhold or report any amount to the ATO.
If you make a mistake and withhold or report an incorrect amount, you won't lose your deduction. You still need to correct your mistake as soon as possible to minimise any penalties. You won't lose your deduction for failing to report payments on a Taxable payments annual report (TPAR) or a payment summary annual report (PSAR).