What is Happening?
In recent weeks we have had first-hand experience with the ATO taking a much more aggressive approach to contractors with outstanding tax lodgements. This has been possible principally due to the use of the Taxable Payments Annual Report (TPAR).
Author: Tom Aitkenhead
TPAR is a report that those in the building industry have been required to lodge since the 2013 year, however we are only now seeing what use the ATO is making of their new data. The TPAR requires a business to report the ABN, address, Gross Payments and GST they have paid to a contractor during a financial year. This is happening with the building and construction industry now, and the cleaning and courier industries will follow.
If you are a Contractor
The ATO are matching the income reported as paid to you to your contractor’s tax return, and the GST to your BASs. Where the figures do not match the ATO may audit you to ensure you are declaring all your income. If you do not lodge your tax returns, the ATO are issuing default tax assessments which assume the income reported as paid to you by others is assessable and that you have no deductions. Where a default assessment is lodged, you get a 75% tax penalty on top of your normal tax assessment plus interest on these amounts.
Similarly, if as a contractor you have outstanding BASs, the ATO is taking action to have them lodged and paid. They are also checking the amounts reported as GST paid to you on the TPAR to your BASs and will investigate discrepancies.
The ATO is aggressively pursuing repayment of the debts where taxpayers do not make arrangements to repay. They appoint debt collectors, obtain garnishee notices to have wages and other payments paid directly to them, and ultimately may try to bankrupt people.
Jones Building Group Pty Ltd engages Aaron as a contractor carpenter on their project in the 2016 year. They report gross payments to Aaron of $165,000 ($150,000 income + $15,000 GST) to the ATO on their Taxable Payments Annual Report for 2016. Aaron has not lodged his 2016 tax return, so the ATO issues a default assessment based on a taxable income of $150,000. The tax they assess is $46,500 plus they apply a 75% penalty of $34,875. They also charge interest on both these amounts and seek to recover a debt of nearly $100,000 from Aaron. When Aaron does not pay, the ATO appoint debt collectors and obtain garnishee orders to have Aaron’s new employer pay his wages directly to them.
Aaron’s true position should have been a taxable income of $80,000 because whilst the gross payment of $150,000 reported is correct, Aaron then had to buy materials and run his vehicle. The tax he should have owed and paid was only $19,150, but the ATO is pursuing 5 times this amount!
If you Engage Contractors
The ATO is creating risk profiles of a business’ subcontractors. We have seen the ATO is measuring the percentage of your contractors:
- that have ABNs;
- that are GST registered;
- that have outstanding tax lodgements;
- that have outstanding BAS lodgements;
- with debts over $1,000 and their engagement with the ATO on these debts;
- with a phoenix or insolvency risk; and
- with superannuation not paid to their employees.
They are comparing these figures to industry averages and presenting this to taxpayers as part of their taxpayer audit process and to explain why your business may receive garnishee notices for your contractors who are not up to date.
What you should do
If you are a contractor you need to ensure you get your income tax and BAS lodgements up to date. Ignoring the problem will result in default assessments which can easily cause enormous incorrect debts and could ultimately lead to bankruptcy.
If you are a business who engages contractors you should remind them of their responsibility to lodge and pay. If your contractors end up with serious ATO problems it could ultimately affect your ability to complete projects. You also need to ensure your TPAR reporting is accurate to avoid any unnecessary problems.
If you identify an issue or need assistance, please contact Hoffman Kelly’s expert accountants on 07 3394 2311 who will be able to assist you in navigating your tax obligations.