Immediately prior to Christmas 2011, Treasury issued draft Regulations that are proposed to apply from 1 July 2012 to businesses in the building and construction industry. The draft Regulations are applicable for the purposes of Division 405 of the Taxation Administration Act 1953 (Cth) and will require those businesses to report to the Australian Taxation Office payments made to contractors that provide building and construction services.
The draft Regulations follow a Consultation Paper issued in May 2011 to the industry and the Australian Taxation Office's Compliance Program 2011-12, which identified industry-wide non-compliance with taxation obligations by contractors in the building and construction industry. The Australian Taxation Office's Compliance Program also identified a more generalised concern about whether workers called "contractors" are actually contractors at law.
It seems likely that information collected under the draft Regulations and Division 405 will be used by the Australian Taxation Office to consider both of these issues. For example, if a contractor derived 80% - 100% of its income from one business in the industry, the legal nature of that relationship may come under scrutiny. While this will obviously impact contractors, it could also impact the businesses themselves in terms of potential PAYG obligations, workcover, and payroll tax, for example.
The draft Regulations apply:
- to a business that is "primarily" in the building and construction industry – the test for this is whether in the current financial year or in the two immediately prior financial years more than 50% of the income of the business is derived from providing "building and construction services"; and
- where that business purchases the services of a contractor and the business and contractor both have ABNs; and
- where that contractor supplies "building and construction services" or a combination of goods and building and construction services, where the services are not incidental to the supply of goods.
"Building and construction services" are defined by the draft Regulations very widely indeed. They encompass, for example, surface, sub-surface, building, structural and other works, and include destruction, design, finishing and improvement works, as well as organisation and management of building and construction services.
Excluded from the draft Regulations are businesses and contractors that are in the same consolidated tax group or a MEC group for taxation purposes, or if tax has been withheld from payments to contractors in accordance with the Income Tax Assessment Act 1997 (Cth).
The draft Regulations will require businesses to report to the Australian Taxation Office payments made to such contractors under Division 405 of the Taxation Administration Act 1953 (Cth). Division 405 requires quarterly reporting of the name of the contractor, the contractor's ABN (if known), and the total payments made for the contractor's services during that quarter (separating those for which an invoice has been provided from those for which an invoice has not been provided).
The Consultation Paper issued in May 2011 suggested that, in the case of the building and construction industry, an annual rather than a quarterly report under Division 405 would be required. This suggestion has not been picked up in the draft Regulations, and it seems quarterly reporting is required.
In addition, while Division 405 suggests that not knowing the ABN of the contractor is not an issue, it seems likely that providing the contractor's ABN will become a reporting requirement, given that the draft Regulations only apply where both the business and the contractor have ABNs.
This new regime is added compliance for the industry. More significantly, it means greater vigilance will be needed around the nature of relationships with contractors and to ensure that a principal/contractor relationship exists at law.
The draft Regulations and the explanatory note can be found here and submissions are due by 20 January 2012.