A robust contractor management system or on-boarding process could go a long way in mitigating the various risks that can arise when engaging contractors. We have seen an increased number of audits from the Revenue Authorities targeting compliance with employment tax matters that can arise in respect of contractor engagement. More than ever, the Revenue Authorities have access to large amounts of data which can be analysed using sophisticated data matching tools to target non-complying businesses.
One such data source is the Taxable Payments Annual Report (TPAR), which is required to be lodged with the Australian Taxation Office (ATO) by 28 August each year. TPARs provide the ATO with information in relation to contractors in certain industries.
The ATO uses this information in order to regulate and oversee its various compliance programs. Additionally, the ATO can share this information with other government agencies including the State Revenue Offices and WorkCover Authorities. Given the increased access to data and the cross-revenue authority sharing of information, businesses are subjected to greater scrutiny and are confronted with the risk that any potential non-compliance will be detected under review or audit.
What information is collected by the ATO?
From 1 July 2013, businesses operating primarily in the building and construction industry have been required to lodge a TPAR with the ATO.
More recently, the TPAR regime has been extended to cover businesses which engage contractors in the following industries:
- cleaning services;
- courier services;
- road freight services;
- information technology (IT) services; and
- security, investigation or surveillance services.
For businesses to be subject to TPAR, the payments for the above listed contractors providing relevant services (e.g. cleaning) must comprise 10% or more of the business’ total GST turnover. This low threshold could leave unsuspecting businesses open to the requirement to prepare TPARs each year where they engage contractors in the sectors listed above.
Broadly, the TPAR must include the following details of contractors providing services in the above-mentioned industries:
- the contractor’s ABN (if available);
- name and address;
- the total amount paid to the contractor; and
- the total amount of GST included in that amount.
How information disclosed in the TPAR can be used by regulators
The information can be used by the ATO to audit business compliance in relation to payments to contractors and whether there is any potential shortfall or obligation in respect of:
- PAYG Withholding;
- Superannuation Guarantee; and
- Fringe Benefits Tax (FBT).
Similarly, the State Revenue Offices and WorkCover Authorities may request and obtain from their counterparts at the ATO, the contractor information contained in the TPAR to run their own compliance programs in relation to:
- Payroll tax; and
Accordingly, for those businesses that engage contractors, we recommend they review their contractor management processes and systems to ensure that any compliance risks are appropriately mitigated.
Please consider the following case studies in relation to payroll tax and WorkCover.
Case study 1 – Payroll tax exposure
BuildCo is in the business of building residential apartments in Melbourne, so BuildCo primarily operates in the building and construction industry. BuildCo engages a large number of contractors. In the last four years, total payments to contractors amounted to $1 million per year. BuildCo has prepared a TPAR and lodged it with the ATO.
BuildCo has treated all of its contractors as exempt from payroll tax. BuildCo was identified by the State Revenue Office of Victoria (SRO) as part of its data matching program using the TPAR.
The SRO notified BuildCo of the commencement of an investigation into its payroll tax compliance, focusing on contractor exemptions claimed by BuildCo in the previous four years.
BuildCo was able to satisfy the SRO that contractor exemptions were correctly claimed in respect of contractor payments totalling $600,000 for each relevant year. However, BuildCo failed to provide relevant substantiation documents to support contractor exemptions for contractor payments totalling $400,000 for each relevant year.
The SRO determined that for each relevant year, the contractor payments of $400,000 should be subject to payroll tax at the rate of 4.85%. The SRO issued assessments to BuildCo for the primary liability of $19,400 for each relevant year. The total assessments, including interest and penalties can amount to $98,400* for the four year period.
*Calculation of potential interest and penalty charged is approximate, for demonstration purposes only.
Case study 2 – WorkCover exposure
The SRO notified the WorkCover Authority of its audit findings in relation to BuildCo’s contractors. As a result, the WorkCover Authority commenced its own investigation of BuildCo.
BuildCo has not reported any of its contractor payments ($1 million per year for the previous four years) as rateable remuneration for Workcover purposes.
Upon completion of the investigation, the WorkCover Authority concluded that contractor payments of $570,000 are not rateable remuneration. However, contractor payments of $430,000 are deemed to be rateable remuneration due to the following reasons:
- the principal object of the contract was not provision of materials or equipment; or
- more than 80% of work under the contract was performed by the same individual; or
- more than 80% of the contractor’s overall services income was earned by the contractor from BuildCo.
As a result of increased rateable remuneration and assuming the industry rate is 2%, the WorkCover premium increased by $8,600 per year for each of four years under the review, i.e. by $34,400* in total. The above premium amount does not take into the account any interest or penalties which could be imposed.
*The numbers in the case study are provided for demonstration purposes only. The case study is not suggesting that the SRO and WorkCover will come to the same conclusion in relation to contractors. While the payroll tax and WorkCover rules in relation to contractors are similar, there can be variations.
How can we help?
There are several ways how we can assist employers, including:
- Review existing and proposed contracting arrangements and advise on any employment taxes obligations arising out of the arrangements;
- Review existing (or develop new) contractor management systems, contractor procedures or contractor questionnaires to ensure that the on-boarding of contractors allows the business to identify potential issues;
- Advise which documentation should be collected in relation to contractors in order to substantiate various payroll tax and WorkCover exemptions;
- Ensure that the contractor payments disclosed to the ATO in the TPAR are consistent with the disclosures made to the State Revenue Offices or WorkCover Authorities;
- Assist with any contractor reviews or audits from the ATO, SRO or WorkCover.
Stay tuned for our follow up bulletins with case studies in relation to PAYG Withholding and Superannuation Guarantee risks arising out of the engagement of contractors.
If you have any queries in relation to the above, please contact a member of our employment taxes team.