CCF NATIONAL OFFICE ABN 41 639 349 350 Level 1, 210 High Street Kew VIC 3101
P (03) 9851 9900 F (03) 9851 9999 E [email protected]
www.civilcontractors.com
The General Manager Business Tax Division The Treasury
Langton Crescent PARKES ACT 2600
27 June 2011
Dear Sir or Madam,
The Civil Contractors Federation (CCF) welcomes the opportunity to comment on the Consultation Paper, Reporting of Taxable Payments for Contractors in the Building and Construction Sector, released by the Assistant Treasurer on 30 May 2011.
The Civil Contractors Federation
The Civil Contractors Federation (CCF) is the member based representative body of civil engineering contractors in Australia providing assistance and expertise in contractor development and industry issues.
Through our Federation we represent 2000 small, medium and large sized contractors who in turn employ many thousands of Australians in an industry of some 350,000 people. Our members are involved in a variety of projects and activities including the development and maintenance of civil infrastructure such as roads, bridges, dams, wharves, commercial and housing land development.
Infrastructure development plays a vital role in our national prosperity.
Background
The 2011 Federal Budget, released on 10 May 2011, contained a proposal to have all businesses in the building and construction industry report all payments made to contractors to the Australian Tax Office (ATO). This would take effect from July 2012 and only apply to the building and construction industry in the first instance.
Since then there has been a significant amount of concern expressed about the proposed requirements from various industry bodies and other commentators. The CCF has released its own member briefing critical of the proposals. At an industry meeting with the ATO the
2 CCF Chief Operations Officer, Chris White was notified that industry would be consulted on its implementation along with the release of a consultation paper.
On 30 May 2011 Assistant Treasurer Bill Shorten released the consultation paper titled Reporting of Taxable Payments for Contractors in the Building and Construction Industry1. Interested parties have been asked to make a submission on the paper by 27 June 2011. The remainder of this document will explore the issues raised in the consultation paper and CCF’s response.
Issues
Rationale for implementation and evidence
The introduction of the new reporting requirements are designed to reduce taxation non-compliance by requiring every business who employs a contractor to report all payments made to that contractor and provide this to the ATO on an annual basis. This will then be cross matched against other data provided by contractors to ensure that tax liabilities are met.
The ATO claims that compliance with taxation obligations is poor and represents a systemic risk to revenue collection. The following evidence is supplied by the ATO to support its non-compliance argument:
• That the building and construction industry was the least compliant of the six largest industries in the micro market, based on analysis of data from the 2006 and 2009 income years.
• An audit program based on 2009 data found that of the contractors in the building and construction industry, 51% either had not lodged a tax return or had omitted all or part of their income.
The consultation paper provides no references for the claims made around non-compliance in the building and construction industry. In addition, the claim that 51% of contractors in the building and construction industry were found to be non-compliant only relates to entities identified as high risk, meaning that the wider industry is likely to have a much lower level of non-compliance. Furthermore while 34% of entities under the audit were contractors in the building and construction industry, this is unsurprising given that there are 330 000
contractors in the industry out of a total of approximately 1 million contractors (33%). Other evidence suggests that the level of non-compliance is low. An audit of 55 000
independent contractors by the ATO in 1998 resulted in adjustment notices being issued to only 714 (1.3%), some of which were for refunds2
1 Available at http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2046.
. Since then no general audit of the industry has been conducted to verify whether these results are still valid.
2 Available at http://www.businessspectator.com.au/bs.nsf/Article/indepedent-contractors-Labor-budget-Bill-Shorten-J-pd20110512-GS37P?OpenDocument&src=srch
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Compliance Burden
The obligation to document and report every payment made to a contractor will create a significant level of burden for contractors. The ATO claims that contractors already
commonly collect this information under existing record keeping requirements. However the requirement to collate and maintain yearly records and document every single payment, regardless of size is excessive.
In the Board of Taxation’s Post Implementation Review into the Alienation of Personal Services Income Rules3
“If the reporting obligation is to apply too broadly, it could result in unnecessarily high compliance costs for payers compared to the compliance risk associated with
personal services income”
, released in October 2009, the Board examined the issue of introducing a reporting obligation similar to the current proposal by the ATO. It noted in its report that:
The question then remains whether the level of non-compliance justifies the imposition of a wide-scale onerous reporting regime. Until the ATO conducts a current comprehensive tax audit similar in nature to that conducted in 1998, it is difficult to determine whether the obligations are justified.
Education, Information Provision and IT Systems
The paper makes note of the ease with which contractors can supply the proposed tax information. This is open to debate given that some smaller contractors may not make use of the appropriate accounting software. In addition it is unclear as to whether every transaction is required to be tracked, regardless of its magnitude. If so, this would create an excessive burden on contractors.
The information required in the mentioned “Division 405 report” is currently not available. Businesses will be required to manually compile the report or request that their software provider modifies their accounting software. In addition the “Division 405 report” would allow the Commissioner to request any other information relevant to the payment. This could further increase the burden on businesses who could be faced with open-ended information requests. The requested information should thus be defined clearly and limited.
It is important that contractors continue to have access to education and training from the ATO on any proposed changes. This could take the form of fact sheets, training sessions and forums, and relevant templates. The ATO would also need to ensure that the relevant accounting software can be modified to allow contractors to easily submit transactions to the ATO on an annual basis.
3 Available at
http://www.taxboard.gov.au/content/content.aspx?doc=reviews_and_consultations/alienation_of_personal_ services_income_rules/default.htm&pageid=007
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Other Industry Response
Other Industry Associations are justifiably concerned about the announced tax reporting requirements. For example, Master Builders Australia released a press statement shortly after the announced measures with Mr Wilhelm Harnisch, CEO of Master Builders Australia stating:
“The new reporting arrangements will impose an additional red tape burden on a yet to be determined category of contractors. For smaller contractors this additional compliance would be an unacceptable time and cost burden.”
Independent Contractors Australia has also raised concerns about the proposed
arrangements. The CCF concurs with the sentiments expressed by these organisations.
Alternative Approaches
The CCF is of the view that other options are available for the Government in tackling the non-compliance issue. One of these centres on the use of valid ABN’s when reviewing tax invoices, as this is an area noted for its non-quotation or invalid quotation of ABN’s. This could involve auditing the government’s ABN database or building online validation of ABN’s into computerised accounting packages.
Another approach, which the paper notes as being costly and ineffective, is a compliance and audit campaign. While this may be the case, it does not assess this against the extra costs of the proposed solution. The ATO regularly conducts audits across a range of areas and it is not clear why there should now be a substantial shift away from this approach to one that places a significant burden on all contractors, without recognising that the majority of contractors are already compliant.
In considering the added burden of the proposals, the ATO could consider limiting reporting to transactions above a certain threshold, adopting a narrow definition of “building and construction services” (for example, targeting non-compliant sub sectors rather than the whole industry) and/or excluding payments that are predominately for the supply of goods and services. Such measures would limit the compliance burden, particularly for smaller contractors, while ensuring that the ATO can identify and audit non-compliant entities.
Conclusion
Given the lack of comprehensive evidence on contractor compliance and the increased compliance burden from the proposed arrangements, the CCF is opposed to the proposals as they stand. While the CCF is obviously supportive of contractors meeting their tax obligations, any additional compliance measures must be able to be justified against the nature and scale of non-compliance. The CCF is of the view that this has not been demonstrated.
5 The CCF looks forward to working with Government on these and other matters as the consultation process progresses.
If you have any questions or concerns on any matters raised in this paper, please do not hesitate to contact me at [email protected].
Yours Faithfully,
Robert Row
