Helm Accounting Blog

The employer obligations area of the ATO is collecting information about payments made to contractors for the 2009–10 to the 2011–12 income years. Data will also be collected from businesses being audited in 2012–13 period as well.

Records relating to approximately 75,000 individuals and entities who have received contract payments from employers or businesses will be electronically matched with certain sections of ATO data holdings to identify non-compliance with lodgement and reporting obligations under taxation law.

Called the Contractor Payments Data Matching Program, it will enable the ATO to:

• identify and address the compliance behaviour of contractors who may not be correctly meeting their taxation obligations
• be more strategic in its approach to determine appropriate educational and compliance strategies to encourage voluntary compliance for contractors.

This program also allows the Registrar to verify the integrity of the information held on the Australian Business Register.

The tax free threshold is the amount of income you can earn each year before paying any tax.

From 1 July 2012 there has been an increase in the tax-free threshold from $6,000 to $18,200.

What this means is, if you are an Australian resident for tax purposes, the first $18,200 of your yearly income is not taxed.

The Australian Tax Office has released new regulations that require businesses in the building and construction industry to report annually on payments they make to contractors.

Essentially, they are putting the ownership on you to collect more information about payments contractors receive to allow data cross matching for reviews and audits.

We are especially concerned for businesses with a large number of contractors – now you have a lot of extra people to monitor on the Tax Office’s behalf. The Tax Office is counting on these new regulations to bring contractors who have not been reporting their income correctly (if at all) into the tax system.

What this means for you is that you need to be absolutely certain that your contractors are compliant – and also be aware that in some cases the Tax Office could in fact deem some contractors to be employees. A major headache for you!

Where you need to be careful is if you have a contractor who is an individual operating under an ABN but works the majority of his/her time for you and only provides labor services (as opposed to providing both goods and labor) then the tax office will most likely view him/her as your employee instead of a contractor. Suddenly you become liable for the Superannuation Guarantee and Pay-As–You-Go Withholding Tax.

What payments must be reported?
Payments made under a contract, either in whole or in part, for the supply of building and construction services must now be reported. Payments that are made for either the supply of purely goods/materials (not services) or payments for employee salary and wages don’t need reporting.

Examples of the kinds of building and construction services that will be covered include:
* architectural work (including drafting and design)
* installation of hard-wired alarm systems (security, fire, smoke, etc.)
* asphalt and bitumen work
* gas plumbing
* demolition
* electrical work
* land clearing
* installation of hot water systems
* assembly, installation or erection of pre-fabricated houses
* bricklaying
* installation of septic tanks
* fencing
* building of room components (e.g. kitchens, bathroom components, laundry components, cupboards, etc.)

Who is reported on?
Any contractor or subcontractor who is engaged in the building and construction industry, who quotes their ABN to the purchaser and receives a payment for building and construction work.

Is anyone exempt?
The reporting will NOT generally apply to domestic building projects, it will be limited to business-to-business transactions only. However, where a domestic building project is undertaken by builders using any subcontractors, then they will need to report those payments.

Who needs to do the report?
Businesses, including sole traders or contractors wholly or principally engaged in the building and construction industry, will be required to report. Private individuals such as owner builders will NOT be required to report.

What’s it called?
The report will officially be known as a ‘Division 405 Report’. It will contain information that identifies the ‘supplier’ and the payments to the ‘supplier’ in the reporting period. Businesses will be required to report the actual payments made to each contractor. All payments must be reported, there is no minimum amount.

What information does the report need?
The report must include the following details:
* contractor’s name
* contractor’s ABN
* contractor’s address (if known)
* the total amount paid or credited to the contractor during the financial year
* whether any GST has been charged

It is important to note that even though you or the supplier may be registered on a cash basis for GST, all reporting for this new report must be done on an accruals basis.

How often do I need to report?
At this stage reports will need to be made once a year but this could change as there is provision in the regulations for the reports to be lodged quarterly. You will need to begin recording payments from 1 July 2012, with the first annual reports required on the 21 July 2013. A business failing to provide the report by the due date may be liable to pay a penalty of $2,200.

What do I need to do?
What you must do now is to consider whether your current systems are good enough to allow you to record this new information. What changes your business will have to make to be ready to start reporting by 1 July this year?

The last thing you need to do is race to catch up 12 months worth of contractor payments in July next year.

There are easy ways to avoid the pain. If you’re using Xero and Workflow Max we have a solution. Want to know more?

Prefer visuals?
This flow chart will give you an idea of how the changes will affect you.