New contractor tax reporting requirements

A change to the reporting requirements for businesses in the building and construction sector is about to become a reality from July 1, 2012. The new ‘Taxable Payments Report’ will require operators to report on certain payments made to contractors. The Tax Office says data from the Taxable Payments Report will improve compliance and detect contractors who have either not lodged returns or not included all of their income.

Who is affected?

The additional payments reporting burden will fall mostly upon:

  • building and construction businesses – required to report on payments made to contractors they engage, and
  • contractors working in the construction industry – required to report on payments made to sub- contractors they engage.

Note that a contractor who does not pay other contractors does not need to do anything. The government says the Taxable Payments Report will only introduce further requirements for contractors themselves where they make payments to other contractors, or sub-contractors, where both are operating in the construction industry.

It should also be noted that the new regulations will not generally apply to domestic building projects — for example, a private home owner making payments to contractors for an extension to their house — but are intended to cover commercial building projects. However a domestic construction project where the engaged builder uses the services of sub-contractors will trigger a reporting requirement for that builder.

Generally, the new report will be required from businesses:

  • with an Australian Business Number (ABN)
  • that operate primarily in the building and construction industry, and
  • that make payments to contractors for construction services.

A business is defined as being ‘primarily in the industry’ if more than 50% of business activity relates to, or income is derived from building and construction services in the current financial year. A business is also considered to be in the construction industry if, in the financial year immediately preceding the present year, 50% or more of business income is derived from building and construction services.

It will not be necessary to report payments which are subject to PAYG withholding.

The business will be required to report actual payments made to contractors, and include the following details:

  • the contractor’s name*
  • their ABN
  • the contractor’s address
  • total amount paid or credited to the contractor over the income year, and
  • whether any GST has been charged.

*A contractor can be an individual, partnership, trust or company.

What needs to be included

The Tax Office maintains that all the details needed for the Taxable Payments Report will be contained in the invoices a construction business receives from its contractors — that is, the sort of information which businesses will already be keeping in their business records under existing tax law.

A construction business is not required to report on payments where the invoices are for goods only, such as building supplies and materials. However where there is a mixture of labour and goods, the whole amount must be included (unless the ‘labour’ is incidental, such as demonstrating the use of a particular item).

But only amounts relating to paid invoices at each June 30 should be included, not amounts a business has been invoiced for but has not yet settled by the end of the financial year.

Activities covered

The Tax Office says ‘building and construction services’ includes the following activities if these are performed on or in relation to a building or structure, other works, or surfaces or sub-surfaces:

[one_third]

  • Alteration
  • Assembly
  • Construction
  • Demolition
  • Design
  • Destruction
  • Dismantling

[/one_third][one_third]

  • Erection
  • Excavation
  • Finishing
  • Improvement
  • Installation
  • Maintenance

[/one_third][one_third_last]

  • Management*
  • Modification
  • Organisation*
  • Removal
  • Repair
  • Site Preparation

[/one_third_last]*of building and construction services

When, and why the change

The first Taxable Payments Report will be required for the year ending June 30, 2013 and falls due 21 days later (or by July 28 if a business lodges business activity statements quarterly) — so affected builders will need to start keeping appropriate records from the end of June this year.

The Tax Office says that after the first year of operation, it plans to accept quarterly reports rather than annual reports from construction companies.

The Tax Office’s expectation is that the resulting data will potentially lead to more auditing triggers being activated, and it says the reported data will be shared with state and territory revenue offices to verify compliance with obligations such as payroll tax or workers’ compensation.

However building industry groups have warned that the new reporting regime will add costs and paperwork headaches, and also claim that the measures will do little to counter ‘cash economy’ activities.

Set-up costs for an individual construction business to cope with the new tax reporting regime, according to the government, should be about $300. The government estimates the additional annual running costs to be around $90. Building industry representatives however are estimating an impost for businesses of more than three times these amounts.

Whether the reporting regime will be extended to other industries is still being considered, says Treasury, however possible sectors under consideration include financial and insurance services, professional and technical services, rental, hiring and real estate services, the retail trade, and agriculture, forestry and fishing.

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Builders and contractors: Beware the Personal Properties Security Register

Financial institutions are familiar with the idea of registering ‘security interests’ over loans or mortgages — which flags that the asset involved (such as property or a vehicle) has a payment obligation attached. But the Personal Properties Securities Register, that came into effect on January 30, 2012, extends the need to register interests to other industries, including the construction sector.

Although the requirement does not apply to land or buildings, it fundamentally changes the law and ongoing practices that businesses will have to adopt in relation to ‘interests’ in most other kinds of assets. In particular for the building industry, this will affect how construction businesses need to deal with their assets — which may include tools, machinery, equipment and building materials — to ensure protection of ownership and rights to payment for building and contracting arrangements.

Under the new regulations, a security interest also needs to be registered for goods hired or leased, as well as materials consigned or supplied. So any time valuable equipment, for example, is left on or supplied to a building site before payment is received, a risk will arise that title or a right to payment for these items can be lost unless interests are registered.

A real case illustrates the danger. A hire company leased a number of ‘port-a-loo’ units to a construction company. At the same time, the building business had taken out a secured loan from a financial institution, which consequentlyregistered its security interest over the construction company’s assets. The port-a-loo business did not consider registering its interest in the leased port-a-loos as it seemed obvious that it was the legal owner of them.

When the construction firm became insolvent, the financial institution had the only registered interest in the port- a-loos — even though the construction firm had only hired the units and not bought them. Hence the port-a-loo hire company was not entitled to recover their own assets, and the units were instead sold off by the construction company’s receivers.

Other examples of everyday construction needs that may come under the Personal Properties Securities Register regime include:

  • cranes, forklifts, scaffolding or fencing supplied on hire to a building site
  • building materials, equipment and other items (such as pre-fabricated frames, bricks, formwork, tiles, appliances) bought by the builder and supplied to the site before payment is received from the supplier
  • tools, electrical or plumbing materials stored by contractors or sub-contractors in a building site shed.

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