The building industry gets ready for changes to tax reporting

In last year’s Federal Budget on 10 May 2011, the Government announced it would establish a new reporting regime to require businesses in the building and construction industry to report annually on payments they make to contractors in that industry. Draft regulations have been released to implement this.

The new regime will commence on 1 July 2012, with the first annual reports required for the year ending 30 June 2013. It should be noted that the regime will not generally apply to domestic building projects, and will cover only business-to-business transactions. However, where a domestic building project is undertaken by builders using subcontractors, then they will need to report those payments.

The aim of the regime is to improve compliance with taxation obligations by contractors in the building and construction industry by providing the ATO with sufficient information to allow data matching for reviews and audits.

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; building of room components (eg kitchens, bathroom components, laundry components, cupboards, etc).

The ATO says the new regime will operate through the existing Payment, ABN and identification verification system legislation which has been in place since 1 July 2000.

The intention is that the information to be reported will be only the information that businesses should already be keeping in their business records and for which they would be entitled to a tax deduction.

In a hopeful sign, the ATO and Treasury are consulting with industry with a view to minimising the compliance cost for businesses. The ATO is also working with software developers to incorporate the new reporting arrangements into accounting packages to further assist businesses that need to provide the new annual report.

Services provided that are incidental to the main building service will be outside of the new system. For example, a paint store provides paint to painters as well as an in-house painting service. For a small additional service fee, the store will tint the paint to the colour the painter instructs. As the provision of the tinting service is merely incidental to the supply of the paint, under the new rules, the painter would not be required to report the payment it makes to the paint store.

In relation to the Commissioner’s discretion about the timing of the payment reports, the ATO said it is trying to minimise costs for business, therefore annual reporting is the preferred choice to coincide with the income tax return lodgment cycle. For those businesses that may prefer to report more often than annually, the ATO said it plans to accept quarterly reports after the first year of operation of the new regime.

There is some concern about the potential impacts of the new reporting for businesses with a large number of contractors. The ATO has acknowledged that contractors may be brought into the tax system as a result of the new regime, and therefore it is intending to target both reporters and reportees as part of educating the industry about the changes.

The ATO considers the current level of compliance in the building and construction industry was “not acceptable”. It said the payments that will need to be reported are held in business records but are not necessarily finding their way into the income tax returns of the payees. The expectation by the ATO and the Government is that the combination of reporting, awareness of it by reportees and, ultimately, the pre-filing of reported payments into income tax returns will result in increased compliance in the industry.

As to the scope of potential ATO audits that might result from the regime, it is understood the ATO proposes to generally take a forward looking approach, but depending on the circumstances, it considers it is not precluded from reviewing prior years as part of its compliance activity.

The ATO said the reported data may also be shared with State and Territory Revenue Offices to verify compliance with obligations such as payroll tax and workers compensation.

In relation to whether the reporting regime may be extended to other industries, the ATO noted that the Budget announcement referred to consultation with the commercial cleaning industry. However, at this stage, that is still an issue for the Government to consider.

Although the intention is that only information businesses already have will need to be reported, the new regime still represents another compliance cost on businesses.

The period for comment on the draft regulations to implement the reporting regime has now closed. The final regulations are now being developed. SMEs that may be affected by the new system should be aware of its existence, and that it will start on 1 July 2012, although the first annual report will not be required until after 30 June 2013.