New tax reporting system for builders makes for more red tape

Plenty has been written about measures announced in the 2012 federal budget, so I won’t go over old (although not very old) ground there.

And in any case, the impact of those announcements won’t be able to be properly analysed until we see the legislation that will implement them – we need to see “the whites of the government’s eyes” so to speak.

What I will discuss is something that is about to affect the building and construction industry, and impose some more red tape.

Starting on July 1 this year, a new reporting system will apply that will require payments made to contractors in the building and construction industry to be reported to the Tax Office. Businesses in the industry will need to report the total payments they make to each contractor for building and construction services each year.

The aim of the system is to improve compliance with tax obligations by contractors, but of course it will impose a new compliance burden on employers in the industry. The information reported will be used by the ATO for data matching to detect those contractors who may not have included all their income or lodged tax returns.

Under the new system, a business will be considered to be a business that is primarily in the building and construction industry (and therefore will need to report) if any of the following apply:

• in the current financial year, 50% or more of its business activity relates to building and construction services;
• in the current financial year, 50% or more of its business income is derived from providing building and construction services;
• in the financial year immediately before the current financial year, 50% or more of its business income was derived from providing building and construction services.

The kinds of payments requiring reporting would include those for assembly and construction costs, demolition costs, excavating, and site preparation.

For each contractor, a business will need to report the following details each financial year:

• ABN, if known;
• name of the contractor;
• address of the contractor;
• gross amount the business paid for the financial year (this is the total paid including GST);
• total GST included in the gross amount the business paid.

While the ATO expects that the details a business will need to report will generally be contained in the invoices it receives from its contractors, the specific compliance requirements of the new reporting system will simply represent another cost to affected businesses.

Nothing connected with the tax system is simple!

The first reporting period under the new system will be for the year ending June 30, 2013. That might seem a long way off, but those affected must remember that they need to begin collecting the information they need to report from July 1 this year.

The ATO has now advised that the first Taxable payment annual report will be due on July 21, 2013 for payments made to contractors in the building industry in the 2012-13 financial year. However, the ATO said for taxpayers who lodge their BASs quarterly, an extension will be provided to July 28, 2013. The extension will be provided for one year only and only for those taxpayers who lodge quarterly.

The ATO has just begun sending out information letters directly to businesses in the building and construction industry that have possibly made payments to contractors. The aim of the letters is to inform businesses in the industry of the reporting system starting from July 1, 2012.

The letter also includes a fact sheet providing businesses with information on:

• who needs to report;
• details they will need to report;
• payments they will need to report; and
• when and how to lodge the Taxable payments annual report each year.

The ATO will also be conducting web-based seminars and assistance visits for businesses that require help in understanding the new reporting system.

While the aim of the new reporting system is admirably about improving tax compliance, those in the building and construction industry will need to ponder what they will be required to do beginning in only a few weeks’ time.

Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.