MEMBER 184 writes:
"Our accounting firm operates in one of Australia's booming areas, where considerable construction work is currently being undertaken.
We are currently assisting 3 clients where the ATO is arguing that contract payments made by them to Sub-Contractors should have been treated as wages (liable to deduction of PAYG), rather than contract payments (where no deduction is required if the Sub-Contractor provides an Australian Business Number (ABN)).
In our view, the ATO is 'pointing the gun' at Head Contractors without taking any responsibility for the part the ATO has played in the loss of revenue from the incorrect issue and use of ABNs.
As many practitioners will recall, the former Prescribed Payment System (PPS) required Head Contractors to deduct 20% tax from contract payments -- unless the Sub-Contractor supplied materials & machinery etc., in which case the Sub-Contractor could apply for a variation and reduce the percentage deducted.
In my view, the ATO created its own income tax 'black hole' by replacing the PPS with a Voluntary Agreement System and, at the same time, making it so easy to obtain an ABN. That view has been supported by the recent announcement that, from 1 July 2012, businesses in the construction industry must report details of payments made to Contractors (just like the old PPS), and the tightening of the criteria for obtaining an ABN (especially if you are a labourer or contractor). But instead of acknowledging the problem and drawing a line in the sand, the ATO is now going after Head Contractors and penalizing them for not deducting PAYG, even where they have been provided with ABNs by their Sub-Contractors.
Contractors build things, they aren't Tax Lawyers. If a Contractor offers to provide services to a Head Contractor and quotes a legal ABN, the Head Contractor is surely entitled to assume that person is carrying on a business enterprise. Otherwise, the ATO shouldn’t have issued the ABN in the first place.
Instead of preparing Fact Sheets that state that having or quoting an ABN makes no difference to whether a worker is an employee or contractor for a job (see 'Common myths about the employee/contractor decision'), the ATO should take responsibility for the fact they have issued ABNs to people who were not carrying on a business, and to start a campaign to clean up and remove improperly issued ABNs.
Contractors should not have to run to their laptops, Google up 'Contractor vs. Employee', and then complete a 30-minute 'decision tool' before hiring someone who is holding themselves out as a Contractor to complete a job.
The solution is very simple: the Government needs to re-introduce a form of PPS that requires all Contractors to deduct 20% tax from payments to Sub-Contractors predominantly providing labour services. The whole problem would disappear and, most importantly, the ATO would collect a great deal more tax!
When PPS was replaced with a Voluntary Agreement System in the early 2000s, there were a number of very obvious reasons why there would be problems:
1. Using the word 'voluntary': a businessperson is unlikely to want to voluntarily increase their ATO obligations (and associated paperwork) by withholding and paying tax on behalf of Sub-Contractors, when they have the option of merely paying a cheque for services.
2. The ATO immediately lost its ability to track Sub-Contractors: under the PPS, Head Contractors were required to provide a PPS Summary to the ATO at year end with a copy of all PPS Statements issued - after 12 long years, the ATO has re-introduced the requirement for Head Contractors to list payments made to other Contractors and Sub-Contractors; but it is too late - the horse has bolted!
3. Sub-Contractors are not motivated to lodge tax returns: given that the reason for introducing the PPS was to stem tax evasion, the ATO must surely have been aware that, by removing the PPS, there would be a (not insignificant) number of taxpayers who would find it too difficult to budget for their year-end tax liabilities and simply not lodge a tax return.
The ATO, having issued ABNs to almost anybody who asked for one, is now saying to Head Contractors; 'Well we didn't realize that we shouldn't have issued an ABN to Mr Sub-Contractor but, bad luck, you're responsible for the tax you should have deducted, and penalties, because you accepted his ABN at face value'.
In my experience, Head Contractors and Sub-Contractors want to have a contract relationship: they don't want an employer/employee relationship. As a commercial matter, Head Contractors need Contractors who are prepared to work long hours (60 hour weeks are not uncommon) to produce a result, and Sub-Contractors are prepared to engage on those terms.
With respect, the ATO should stop interfering and allow parties to engage with each other on their own terms. In return, Head Contractors should be required to deduct 20% tax from payments made to their Sub-Contractors and include same with their quarterly BAS. They already have to list all payments made to Sub-Contractors from 1 July 2012, so I cannot see this as being a significant, additional burden.
I am sure I speak on behalf of all Head Contractors when I say that they would prefer the extra burden of deducting tax, than having to face full desk audits so the ATO can try to claw back lost tax revenue from Sub-Contractors (which comes about from the ATO's lack of foresight when issuing ABNs in the first place). At 20% of gross, the tax payable by a Sub-Contractor would be covered right up to about $60,000 profit per annum.
There is also the issue of fairness. A Contractor from a lower socio-economic level on, say, $50,000 per year of contract income, with a family to feed, would find a tax bill of approximately $9,000 absolutely insurmountable. Despite the Government's best intentions, these people live from week to week. They budget on the amount of cash they receive each week and spend accordingly. The Government's attempt to deal with this problem by forcing Contractors to put Sub-Contractors on wages - even if they are bona fide Contractors - doesn't make sense.
To summarize, the Government should acknowledge that there are legitimate Contractors in the construction industry, who predominantly provide labour services. The Government should re-introduce the PPS for those Contractors and tighten up further the criteria for obtaining ABNs. In that way, when a Contractor provides their ABN, the Head Contractor can feel safe in the knowledge that they are acting legally if they engage that person to perform contract work."