ATO Compliance Program 2011 – 2012
The industry is made up of a number of civil contractors who collectively employ in excess of 350,000 people who perform services in the maintenance of roads, bridges, dams, commercial and housing developments, ports, etc. around Australia. Essentially, they are a key component of infrastructure maintenance and development, which is vital to Australia’s prosperity.
With the Federal Government targeting contractors generally, civil contractors may be required to comply with the new compliance requirements. The May 2011 Federal Budget, contains a proposal for this industry (building and construction) to report all payments made to contractors to the ATO, taking effect July 2012. Following the release of the consultation paper in late May 2011 submissions were sought to assist with the implementation, and various bodies representing the sector have delivered submissions to the Government for consideration.
The ATO is trying to reduce taxation non-compliance by requiring every business that employs a contractor to report all payments made to that contractor to the ATO, who will then cross match this data against other data provided by contractors to ensure that tax liabilities are being met.
What is Motivating the ATO?
The ATO believes there is a high level of non compliance in this sector and therefore its tax revenue is lower than they believe it should be. They report that in an audit program conducted in 2009, 51% of the building and construction industry either had not lodged a tax return or had omitted all or part of their income. Although, no evidence supports this in the recent consultation paper!
This sector is made up of more than 1 million civil contractors, according to the Civil Contractors Federation.
Key Issues for Civil Contractors
- Significant compliance burden – there will be an obligation to document and report every payment made to a civil contractor – this is regardless of size so even a small one off payment will need to be captured.
- Increased cost to comply with the above. This is potentially excessive for payers compared to the compliance risk associated with personal services income.
- Do all civil contractors collect the information required – this is arguable as not all civil contractors make use of suitable accounting software. Not all the industry players are sophisticated companies. Some may not collect the necessary information and as there is currently no clarity around what has to be collected.
- There has been no current audit – perhaps this should be conducted to see if the new compliance is warranted, or could at least be established only for material payments rather than every payment.
- Lack of information/training by ATO.
Where to From Here?
In reality, it will take time for the ATO to consider the submissions made in late July, so at this stage, the industry will have to stay tuned for updates and information.
Getting Contracts Right and Managing the Client Relationship
The key issue for Civil Contractrors is getting the contracting terms right and managing the risks associated with this practice in place. This sounds easy but can be summarised in two key actions:
- Get the contract right in the first place; and
- Establish a good client relationship that will withstand the storm.
The key to action 1 is understanding the contract before you sign it and make changes to the things you won’t be able to comply with and manage the risks you accept. Having a sound commercial understanding of the contract is a key to getting the right contract, because if you can deliver it, chances are you got it right. Whereas, on the flip side if there are known issues at the start, chances are you will end up in dispute and/or lose money on the contract.
At action 2, if you develop an appropriate and strong relationship with your client, you will be able to openly and cooperatively solve issues and problems as they arise. This also requires civil contractors to maintain awareness of client requirements as chances are this will change over time as scopes of work are only ever a snap shot in time. With a strong relationship between the parties you will be able to manage differences of opinions and disputes. Overarching this is that the civil contractor will deliver a superior service and where this occurs most issues will be overcome. Where service is not delivered the relationship will most likely falter. The key to this is to have regular communication with each other and to air issues early and to have good contract administration practices to keep the contract live and up to date.
If parties create win win situations this basically means there is a value perceived by both and this will generally deliver profit for both. If this starts to change, undertake relationship building activities as soon as possible to get the contract back on track. After-all the relationship will manage any contract deficiencies.