Introduction 

Under Business and Professional Items Schedule 2023, the Australian Taxation Office (ATO) requires businesses to report any payments made to "associated persons" for tax purposes. Associated persons include individuals or entities closely related to the business owner. Accurately reporting these payments ensures compliance with ATO rules and transparency to avoid potential issues.

Eligibility

The ATO considers payments to associated persons if the recipient meets their definition. An associated person could be a relative, related business, or someone with a strong personal or work tie to the owner. Correct reporting reflects true financials and keeps tax records accurate.

What Types of Payments are Included? 

Reportable payments involve monetary exchanges between the business and associated individual/entity. This includes salaries, wages, bonuses, fees for services rendered, and any other compensation or financial gains given to associated persons. The key is the relationship meeting the ATO's association criteria.

Examples of Associated Persons 

Common associated persons in a business setting include:

1. Family: Spouse, children, siblings, parents involved in the business.

2. Related companies: Companies, trusts, partnerships where the owner has significant interest or control. 

3. Close connections: Longtime friends or partners having a close personal/work bond with the owner.

Industry-Specific Directions

Reporting procedures can depend on the industry:

• Family businesses must thoroughly report family member payments to avoid non-arms length concerns.

• Partnerships and trusts need solid proof of payment legitimacy and market-value services.

Recommended Documentation Methods

1. Market rate comparison: Ensure associated person payments match comparable market rates. 

2. Thorough records: Maintain full transaction records outlining payment nature, purpose, and association evidence.

3. Third party validation: Use outside assessments or invoices when able to support payment amounts. 

Example Scenarios

1. Family restaurant owner's spouse salary for managing accounts should match an independent accountant's pay.

2. Business owner commissions sibling for new clients that reflect standard industry rates and have a written agreement.

Recent Updates 

In the last 3 years, the ATO has increased payment reporting scrutiny to prevent tax evasion through closer documentation evaluation and non-arm’s length transaction examination.

Conclusion

Correctly recording associated person payments helps businesses stay ATO compliant. Market-rate payments, comprehensive records, and current policy knowledge can avoid penalties by displaying transparent, legitimate financial dealings. Careful attention contributes to maintaining tax filing integrity for Australian businesses.

FAQs 

Q: What is considered a "close relationship" with the business owner?
A: The ATO considers close relationships to include family members as well as individuals or entities that have the ability to influence the business owner's decisions or affairs. This includes spouses, children, siblings, parents, close friends, business partners etc.

Q: Are all payments to associated persons reportable?
A: Not all payments need to be reported, but it depends on if the payment amount reaches the ATO's reporting threshold for the financial year. Taxpayers should check the relevant threshold for their circumstances. Payments below the threshold generally don't need separate reporting.

Q: How are market rates determined for payments to associated persons?
A: Taxpayers should research salary benchmarks and fee schedules within their industry to determine reasonable market rates. They may also obtain evidence like independent HR or accounting advice, job ads or contractor invoices to support rates being at market levels.