Tax warning on overseas income

Do you earn income overseas? A recent case highlights why you might pay more tax than you thought on foreign income.

If you are an Australian resident and earn income from overseas, such as income from investments, sale of assets such as property, distributions from foreign trusts, etc., you will generally need to declare that income in your Australian tax return. If you have paid tax in a foreign country on that income, you might be able to claim a foreign tax offset to reduce your Australian tax liability.

Sounds simple enough but a recent case highlights where problems can occur and you might end up paying a lot more tax than you thought.

The taxpayer in this case was a resident of Australia but was taxed in the US on gains they made on interests in US real estate. Most of the gains they made were taxed at a concessional rate of 15% (rather than the normal rate of 35%) because the interests had been held for more than one year. Some of the gains were ultimately taxed at 35% in the US.

The capital gains were also taxed in Australia and qualified for the general CGT discount of 50%.

As the taxpayer was a resident of Australia and had paid tax on the US gains, the taxpayer claimed a foreign income tax offset for all of the US tax they paid. However, the ATO amended the tax assessment and only allowed a tax offset for slightly less than 50% of the tax they paid in the US.

The problem for the taxpayer was that while the US and Australia both have tax concessions for longer term capital gains, they operate quite differently. The US applies a lower rate to the whole gain while Australia applies a normal tax rate to half of the gain. Unfortunately for the taxpayer, the Federal Court held that the Commissioner’s approach was correct. If foreign tax has been paid on an amount that is not included in your assessable income then you cannot claim a foreign tax offset on it. In this case, the portion of the capital gain that was exempt from Australian tax because of the CGT discount, was not included in assessable income.

It is not uncommon for people who have made capital gains on foreign assets to assume that they get all of the tax back that they paid overseas. Unfortunately, that’s not necessarily the case and often only a partial credit is available, if at all.

What changed on 1 Jan 2019

• Tampon tax (GST on sanitary products) scrapped
• Voluntary crackdown begins on credit card providers to protect consumers who cannot pay-off their credit card debt or who cannot afford an increased limit
• Higher Education Loan Program:
  • New lifetime caps prevent students repeating courses or continually enrolling in new courses.
  • New loan limits: Increase in fee assistance for students studying medicine, dentistry and veterinary science courses with increases in their loan limit from an estimated $130,552 in 2019 to a new limit of $150,000. $104,440 for all other students.

Another year, another scam. While data driven crime is more sophisticated and difficult to address than ever, human error and judgement remains one of the major problems.

The latest data breach report from the Office of the Australian Information Commissioner (OAIC) is surprising for the simplicity of the problems – 37% of data beaches resulted from human error not malicious attack. In over 20% of reported cases, personal information was simply sent to the wrong recipient. Another 6% of complaints were attributed to system faults.

Since 22 February 2018, businesses covered by the Privacy Act need to report unauthorised access to or disclosure of personal information or loss of personal information that your business holds under the Data Breach Scheme. The rules impact organisations with an annual turnover of $3 million or more, businesses ‘related to’ another business covered by the Privacy Act, or if your business, regardless of size, deals with health records (including gyms, child care centres, natural health providers, etc.,), is a credit provider, or holds Tax File Number information (see the list).

Organisations are required to take all reasonable steps to prevent a breach occurring, put in place the systems and procedures to identify and assess a breach, and issue a notification if a breach is likely to cause ‘serious harm’.

What the statistics from the OAIC demonstrate is that procedural integrity in your business is paramount – train your team to not only be wary of scams but ingrain best practice for the day to day management of personal data. Privacy protection is not just an ‘IT’ issue.

While not the only factor, protecting your systems remains a priority as Marriot Hotels discovered when the Starwood guest reservation database was breached. According to the latest announcement, up to 383 million records were potentially impacted. Of those, there were approximately 5.25 million unique unencrypted passport numbers. On 30 November 2018, the company announced that unauthorised access to the database may have been occurring since 2014.

Similarly, Cathay Pacific released a statement notifying that up to 9.4 million members of their Marco Polo Club, Asia Miles or a Registered Account holder have potentially had their data breached including passenger name; nationality; date of birth; phone number; email; address; passport number; identity card number; frequent flyer programme membership number; customer service remarks and historical travel information.

Remember, hackers can gain access to your business’s data simply by a staff member clicking on a link.

While not impacting personal data, according to the ScamWatch, a common scam is where hackers gain access to a business’ email accounts, or ‘spoof’ a business’ email so their emails appear to come from the company. The hacker then sends emails to customers claiming that the business’s banking details have changed and that future invoices should be paid to a new account. These emails look legitimate as they come from one of the business’s official email accounts. Payments then start to flow into the hacker’s account. The average loss from these scams is around $30,000.

A variation is where the hacker sends an email internally to a business’ accounts team, pretending to be the CEO, asking for funds to be urgently transferred to an off-shore account. Hackers can also request salary or rental payments be directed to a new account.

In 2018, these scams cost Australian business $30 million in 2018.

Simple measures you can take:

• Have strong and enforced processes in place for the management of personal client information.
• Strong authorising procedures for payments – two-step authority.
• Change passwords often and use two-step authentication where available.
• If a client’s bank details have changed, phone them and check the details.
• Train your team on cyber security:
  • Check requests for payments that arrive electronically from other team members and management.
  • Check email addresses are legitimate – look for slight variations.
  • Be suspicious of poorly written emails.
  • Don’t click on links from email – always use your account with the supplier or Government department to check details.
• If contacted by the ATO, contact us to verify the information if you are concerned.

Latest scams

ATO scams

The Australian Taxation Office (ATO) has warned about the emergence of a scam where “…scammers are using an ATO number to send fraudulent SMS messages to taxpayers asking them to click on a link and hand over their personal details in order to obtain a refund.”

The refund scam follows a more sinister four phase scam stating there is a warrant out for your arrest for unpaid taxes in prior years. The scam starts with a text message purportedly from the Australian Federal Police (AFP). Within minutes, your mobile rings and the caller identifies themselves as being from the AFP and working with the ATO. They then ask for your accountant’s details. You then receive a call purportedly from your ‘accounting firm’ asking you to verify the AFP/ATO claims. Finally, you are provided with a way, if you act quickly, to make the AFP go away by paying a fee before your ‘imminent arrest’.

The ATO states that it will not:

• send you an email or SMS asking you to click on a link to provide login, personal or financial information, or to download a file or open an attachment;
• use aggressive or rude behaviour, or threaten you with arrest, jail or deportation;
• request payment of a debt via iTunes or Google Play cards, pre-paid Visa cards, cryptocurrency or direct credit to a personal bank account; or
• request a fee in order to release a refund owed to you.

Medicare Scam

A new phishing scam sent text messages purportedly from Medicare advising the recipient that they are owed a $200 rebate from Medicare. Once the person clicks on the reclaim link, they are asked to provide their personal details including bank account details for the ‘rebate.’

Life does not always go to plan. While we logically know that, most of us don’t plan for the worst – it’s all a bit morbid and time consuming.

The downside of not planning is the potential for hard earned assets to be squandered, family fall-outs, and money handed to the Government that could have been distributed in accord with your wishes. If you are a business owner, then the stakes are even higher.

As a population, planning is more important than ever because:

• The ageing demographic – 1 in 7 of us are now aged 65 and over (3.8 million)
• The baby boomer generation represent only 25% of the population but hold 55% of the wealth
• We are entering a period of intergenerational wealth transfer from the baby boomer generation
• Over the last 25 years there has been an explosion of wealth in Australia

Estate planning is simply identifying your assets and liabilities and what you want to happen to those assets if something happens to you. As part of that, you need to look at the issues that might arise and how best to manage them. All of this is then reviewed for tax outcomes and the legal requirements to provide the best care and protection for your beneficiaries.

If you are a business owner, there are also another set of issues to consider to ensure that the business can continue if you are not able to continue in your current role. Or, your beneficiaries can take their share of the value accumulated in the business. This planning will protect your beneficiaries, the business, and your business partners.

Estate planning does not have to be hard work, but it does have to be planned.

It’s also important to understand that actual wealth or the size of your estate is not the sole reason for estate planning. Estate planning is important for:

• The care and maintenance of minor children.
• Managing the respective rights and expectations of beneficiaries, particularly with blended families.
• Avoiding disputes between family members.
• Relationships outside of the immediate family.
• Managing liabilities of the estate.
• Assets which may not be capable of immediate realisation or where value will be diluted by realisation.
• The transfer of assets through generations.

Estate planning seeks to not only distribute the assets of your estate but do so in a way that protects the estate, addresses issues within the estate, and fulfils your wishes.

What the stats say

While 4 in 5 of us rate our health as ‘very good’, 50% of Australians have a chronic condition that is likely to cause their death, 63% of adults are overweight or obese, and around 45% of us will experience a mental illness in our lifetime.

Leading causes of death differ by age:

• 1–44 years: suicide, land transport accidents
• 45–74 years: coronary heart disease, lung cancer
• 75 years and over: coronary heart disease, dementia and Alzheimer disease

It’s estimated that 138,300 people were diagnosed with cancer and 48,600 died from it in 2018.

MEN:           44% Not overweight or obese     29% Overweight but not obese     27% Obese

WOMEN:     29% Not overweight or obese     42% Overweight but not obese     28% Obese

Australia enjoys one of the highest life expectancies of any country in the world at 82.5 years (in 2015) and is ranked fifth among 35 OECD countries. Japan has the highest life expectancy at 83.9 years.

Men aged 65 in 2014–2016 could expect to live another 19.6 years (an expected age at death of 84.6 years) and the life expectancy of women aged 65 in 2014–2016 was 22.3 years (an expected age at death of 87.3 years).

We’re also working longer – 13% of Australians aged 65 and over participate in the workforce (17% for men and 10 for women). This is compared to 2006 when the workforce participation rate was 8%.This planning will protect your beneficiaries, the business, and your business partners. Estate planning does not have to be hard work, but it does have to be planned.

It’s also important to understand that actual wealth or the size of your estate is not the sole reason for estate planning. Estate planning is important for:

• The care and maintenance of minor children.
• Managing the respective rights and expectations of beneficiaries, particularly with blended families.
• Avoiding disputes between family members.
• Relationships outside of the immediate family
• Managing liabilities of the estate
• Assets which may not be capable of immediate realisation or where value will be diluted by realisation
• The transfer of assets through generations

Estate planning seeks to not only distribute the assets of your estate but do so in a way that protects the estate, addresses issues within the estate, and fulfils your wishes.

Inspired to answer the ‘what would happen if’ question? Talk to us today.

The holidays are traditionally a time to relax and reflect on the importance of family. They are also an opportune moment to think about how you can care for and protect your family all year round.

When you are enjoying the summer break with your loved ones, it can be hard to imagine anything could ever go wrong. But life is unpredictable, which is why life insurance is so important, particularly when you have people who depend on you.

Whether you are a young couple starting out, a growing family with kids at school and a mortgage, or empty nesters with debts to clear before retirement, having the right insurance cover could make a world of difference if the unthinkable happened.

Life insurance is not one product but many, to cover a range of needs. If you are unsure which cover is right for your family, begin by asking yourself a series of ‘what ifs’.

What if you get sick or injured and are unable to work?

You probably insure your car and your home, but the impact on your family is potentially much greater if you lose the ability to earn an income. Whether you are out of action for months or years, few families have enough savings to tide them over until you recover and return to work.

The solution is Income Protection insurance, also called Income Replacement or Salary Continuance cover. This replaces up to 75 per cent of your current income if you are unable to work due to illness or injury. Depending on the policy, it can cover you for short or long periods, sometimes up to age 65, after various waiting times.

What if you suffer a major illness?

The survival rates for critical illnesses such as heart attack, cancer and stroke are improving, but recovery can take a long time and the financial and emotional toll on your family can be high.

The solution is Trauma insurance, also called Critical Illness. This pays a lump sum if you are diagnosed or suffer one of a specific list of illnesses. You could use the money to reduce your working hours, spend time recovering with your family, or to pay for treatment, rehabilitation or a carer.

What if you become permanently disabled and unable to work?

A serious injury or illness can come out of the blue, leaving you unable to provide for your family. A government Disability Pension is unlikely to fully replace your previous salary. And the National Disability Insurance Scheme, while providing care packages, does not pay regular income or a lump sum.

The solution is Total and Permanent Disability (TPD) insurance. This pays a lump sum which you can use to pay off debts, cover medical costs or invest to provide regular income to help maintain your family’s lifestyle.

What if you fall critically ill or die?

It’s a sad fact that any of us could be diagnosed with a terminal illness or die prematurely in an accident. If this happened to you, how would your partner and children cope emotionally and financially? The kids still need to be fed, clothed and educated, the mortgage or rent must be paid, and your partner may need time off work for extra caring duties, adding to the financial pressure. If you don’t have kids or they have left home, your partner could be left with a mortgage and other debts.

The solution is Life cover, also called Term Life or Death cover. This pays a lump sum on your death or the diagnosis of a terminal illness, allowing your family to focus on supporting each other, secure in the knowledge that the bills will be paid.

All these policies can be bought separately or bundled together as often happens with Death and TPD cover.

You may already be covered for some level of insurance via your super fund, however it might not be adequate for your needs. It’s important to have insurance that is tailored to your personal circumstances, that will protect your family’s financial and emotional well-being come what may. We are here to help.

Planning your dream retirement can be an exciting time. The chance to travel overseas or around Australia without having to rush back to work, time to pursue new hobbies, learn a language or spend time with the grandkids. The possibilities are endless, but what will it cost?

Working out how much you will need to live the dream, and what you can afford will come down to a variety of factors. These include whether you own your home, the value of your superannuation and other investments, the return you earn on those investments and your spending patterns. You may also have a younger spouse who will be dependent on income from your investments after you die.

And that’s the big unknown, because none of us know how long we will live.

Plan for a long life

Today’s 65-year-olds can expect to live to an average age of 84.6 years for men and 87.3 for women, or roughly 20 and 22 years respectively in retirement. That’s a long time, and it’s only an average. Half will live longer than that.ⁱ

The challenge is to ensure your cash lasts the distance, however long that may be.

A good way to begin thinking about your retirement needs and working out a budget is to visit the ASFA Retirement Standard, where you will find detailed budgets for different households and living standards.ⁱⁱ

Adding up the costs

The ASFA Retirement Standard calculates that singles aged around 65 would need $27,425 a year to live a modest lifestyle while couples would need $39,442. A comfortable lifestyle would cost $42,953 for singles and $60,604 for couples.

To put this in perspective, the full age pension is currently $23,823.80 a year for singles and $35,916.40 for couples.ⁱⁱⁱ As you can see, this does not stretch to ASFA’s modest budget, let alone a comfortable lifestyle, especially for pensioners who are paying rent or still paying off a mortgage.

Of course, everyone’s needs will be different. Some people may need to spend more on their health, while a contented gardener and homebody may need less money than a keen global traveller with a season ticket to opera, theatre or football.

It’s also important to recognise that your spending patterns are likely to change in predictable ways over the course of your retirement, determined by your health and mobility.

The three stages of retirement

Most people go through three phases of retirement.

• The active years. In your 60s and 70s you finally have the flexibility to travel, spend time with the grandkids and pursue other interests. Expenditure is likely to be high, especially if overseas travel is high on your bucket list. You may also want to help your adult children financially.
• Slowing down. At some point the joints get a little creaky, your mobility and activity decline as does your spending. Travel is closer to home, you may do some voluntary work and begin to live a little more frugally. Spending on health may increase and many will consider downsizing their home.
• The frail years. Most of us hope to remain in our own homes, but many will spend our final years in residential aged care. This may be due to increased frailty, a sudden medical event or cognitive decline. Whatever the reason, spending on health and aged care are likely to increase significantly. While government subsidies may reduce the out-of-pocket costs, having savings will increase your options and access to high quality care at home or an aged card facility.

The Australian Tax Office (ATO) is utilising data provided by the Australian Investments and Security Commission (ASIC) to data match share trades.

The ATO is accessing more than 500 million records detailing price, quantity and time of individual trades dating back to 2014. The information complements information that the ATO already holds from brokers, share registries and exchanges.

Utilising this wealth of information, the ATO will explore what has been reported on tax returns, specifically, capital gains on the sale or transfer of shares and the losses claimed.

Given that more than 5 million Australians now own shares, the ATO is keen to ensure that errors are minimised.

“Almost one third of all Australian adults own shares, and there is evidence that some taxpayers are getting it wrong when it comes to reporting their capital gains or losses from the sale of shares. In particular, we tend to see higher rates of error among those who don’t regularly trade in shares and who are not aware of the tax implications,” Assistant Commissioner Kath Anderson said.

With penalties as high as 75% of the tax shortfall, it is important to ensure that you have your documentation in place for share trades and transfers including records of share purchase and sale prices, as well as costs like brokerage fees. If you sold part of your share holdings, you need to keep records of the parcel you sold and the parcel you are still holding.

A former Foodora Australia delivery rider, Joshua Klooger, recently won an unfair dismissal claim despite a service agreement that classified him as an independent contractor. We explore the implications of the case.

Pivotal to the Fair Work Commission’s decision was the classification by Foodora of Mr Klooger as an independent contractor. The “Corporate Rider” was employed under a service agreement titled “Independent contractor agreement”. At the initial rate of $14 per hour and $5 per delivery, corporate riders would log into an app (the shifts app) which, at predetermined times each week, displayed available shifts. The shifts identified start and finish times and a specific geographical location where the delivery work would be undertaken. The riders could then decide what shifts they wanted. The riders undertaking shifts were provided with a Foodora branded insulated box, and other Foodora branded attire and equipment. Once the shift started, the riders would receive notifications through the app of an order to be picked up from a restaurant. Once the order had been collected, the rider would confirm the pick up, then the deliveries app would advise the delivery address.

In 2016, Mr Klooger’s friend and fellow Foodora delivery rider had his visa cancelled. As a result, Foodora suspended the friend’s access to the shifts and deliveries app. Instead, Mr Klooger gave his friend his access to the Foodora app allowing him to select and fulfil shifts. Over time, three other individuals did the same. Mr Klooger would reconcile his account, deduct tax and a further 1% for his involvement, then pay the substitutes. While the Foodora contract allowed for substituting, it required prior written consent. However, when Foodora became aware of the substitution scheme it took no steps to stop it and instead commended Mr Klooger for his “entrepreneurial initiative.”

The rates Foodora paid to riders and the way in which shifts were allocated changed over time. In July 2016, the hourly rate for new riders/drivers was reduced to $13 plus $3 per delivery, and a $1 per delivery payment for Friday, Saturday and Sunday night work. Towards the end of 2016, Foodora removed the hourly rate for new riders completely, fixing a flat $10 per delivery payment. The flat rate was progressively reduced further and by February 2018, the rate for new delivery riders had dropped to $7 per delivery. In addition, a new “batching system” was put in place which established a fortnightly assessment process that ranked individual delivery riders and offered shifts according to rank. The highest ranked riders were offered shifts well before lower ranked riders.

When determining whether a worker is a contractor or an employee, the courts say “… the distinction between an employee and an independent contractor is rooted fundamentally in the difference between a person who serves his employer in his, the employer’s business, and a person who carries on a trade or business of his own.”

The factors identified by the commission in this case are helpful indicators:

How work is fulfilled. The commission determined that while the riders had the choice to accept the shifts, the shift start and finish times and geographical locations were fixed by Foodora. Despite the ability to self-select shifts, the commission saw that the “process for engagement is similar to a variety of electronic and web-based systems that are frequently used to advise, in particular, casual employees of available shifts that are offered.” While the system is not as prescriptive as naming particular employees, the commission saw the results as essentially similar.

What the contract said. While the Foodora service agreement attempts to establish a relationship of principal and contractor, the commission found that, “The service contract contains many provisions which are similar in form and substance to those that would ordinarily be found in an employment contract document.” These included clauses dealing with rostering and acceptance of jobs, the attire to be worn when on shift, the specific nature of the engagements to be undertaken including requirements that the contractor is to comply with all policies and practices of the principal.

Who had control? Foodora had “… considerable capacity to control the manner in which the applicant performed work.” The commission also noted that the batching system meant that to maintain a high ranking, riders had to perform a certain number of deliveries during a shift, work a minimum number of shifts in a week and work a number of Friday, Saturday and Sunday shifts.

Generating business. In Foodora’s favour was the fact that it did not prevent its riders from working for other companies or delivery platforms. However, in this case the commission compared this ability to casual restaurant staff working for more than one restaurant.

Is the contractor operating separate to the principal? One of the aspects of many contractor versus employee cases is whether the individual holds themselves out to the public as a separate business in their own right – do they have their own place of business. In this case, Mr Klooger worked exclusively for Foodora.

Supply of tools of trade. Mr Klooger’s only investment as a contractor was his bicycle which he also used privately. An asset which the commission points out does not require a high degree of skill or training.

Delegation of work. One of the factors that determines whether someone is a contractor or employee is their capacity to delegate work to others. The substitution scheme operated by Mr Klooger was a significant factor in this case as he was delegating work. However, in this instance, the commission saw that the substitution scheme was a breach of Foodora’s own service agreement not evidence of delegation despite their eventual acceptance of the scheme by Foodora.

Identifying as Foodora. Riders had to identify as being from Foodora. Clause 4 of the service contract established an expectation riders dress in Foodora branded attire, and utilise equipment displaying the livery of the Foodora brand.

Tax, leave, and remuneration. As Foodora classified the riders as independent contractors no tax was deducted from payments made. Riders were not entitled to holiday or sick leave. When Foodora paid Mr Klooger, they would generate a recipient created invoice. Once Mr Klooger had reviewed the invoice and made any corrections, the invoice would be paid.

Reputational damage. If the riders did not perform to the standard expected by customers, it was Foodora that faced reputational damage not the riders.

While Mr Klooger won his case and was awarded $15,559, Foodora appointed voluntary administrators on 17 August 2018, well before this case came before the commission. The commission pursued the case on public importance grounds.

Foodora is by no means the first company to fall foul of the definition between contractor and employee; there are a litany of companies that have stepped over the definitional boundary but it is one of the first to test platform based work relationships in the gig economy.

However, not all gig economy businesses engaging with workers using a platform are at risk. In December 2017, an unfair dismissal claim against Uber was dismissed. Many of the factors evident in the Foodora case were not evident in Uber’s model. Interestingly, the commission noted that current laws that determine work for wages and the nature of employment relationships “… developed and evolved at a time before the new “gig” or “sharing” economy. It may be that these notions are outmoded in some senses and are no longer reflective of our current economic circumstances. These notions take little or no account of revenue generation and revenue sharing as between participants, relative bargaining power, or the extent to which parties are captive of each other, in the sense of possessing realistic alternative pursuits or engaging in competition. Perhaps the law of employment will evolve to catch pace with the evolving nature of the digital economy.”

Pre-empting the commission’s warning on the gig economy was the 2017 Senate report  that asked whether the gig economy is “hyper flexibility or sham contracting.” In addition to exploring the model of organisations like Deliveroo, the Senate committee demonstrated how apps like AirTasker are being used by businesses for ongoing roles without the burden of employment. The fee Airtasker takes is charged only to the worker. Posters deposit payment into an account managed by the company, and Airtasker then releases 85% of that money to the worker, once the job poster declares the work to be complete.

What to do if you engage contractors

If you engage contractors, it is essential to get the facts of the relationship right. Business owners need to take a proactive approach to reviewing arrangements to ensure that the business is not exposed to material liabilities. Key factors include:

• Whether the work involves a particular profession or skill set.
• The level of control the contractor has over how the contract is executed.
• The ability of the contractor to delegate work to another person.
• Whether the contractor supplies his own tools or equipment.
• Whether the contractor has his own place of business.
• The contractor’s ability to generate goodwill or saleable assets during the course of the contract.
• How the contractor is paid (for hours worked or a result).
• The level of risk the contractor bears.
• Whether the contractor is independent or in reality, simply ‘part and parcel’ of the organisation they contract to.

No single factor is determinative; it is the weight of evidence, on balance, across all of the factors.

The implications of misclassifying a worker

The implications of misclassifying a worker go well beyond industrial relations. If a business misclassifies an employee, it impacts on superannuation guarantee (SG), PAYG withholding, workers compensation, and payroll tax. These entitlements will often need to be met even if the misclassification was a genuine mistake.

For SG obligations, there is no real time limit on the recovery of outstanding obligations. However, the ATO will generally only go back 5 years unless the individual employee can prove an entitlement beyond this point. Remember that employers that fail to make their superannuation guarantee payments on time don’t just pay the outstanding superannuation but are subject to the SG charge (SGC) and lodge a Superannuation Guarantee Statement. SGC is made up of:

• The employee’s superannuation guarantee shortfall amount;
• Interest of 10% per annum; and
• An administration fee of $20 for each employee with a shortfall per quarter.

Unlike normal superannuation guarantee contributions, SGC amounts are not deductible to the employer, even when the liability has been satisfied.

Getting it wrong can be a very costly exercise particularly if the error is evident over a number of years.

The Taxable Payments Reporting system was introduced to stem the flow of cash payments to contractors and rampant under reporting of income. Since the building and construction industry was first targeted in 2012, the reporting system has expanded to include cleaning and courier services. Now, a broader set of industries have been targeted.

If you have an ABN, and are in road freight, IT or security, investigation or surveillance, then any payments you make to contractors will need to be reported to the Australian Tax Office (ATO).

Be careful here as the definition of these industries is very broad. For  example, ‘investigation or surveillance’ includes locksmiths. The definition covers services that provide “protection from, or measures taken against, injury, damage, espionage, theft, infiltration, sabotage or the like.”

IT services are the provision of “expertise in relation to computer hardware or software to meet the needs of a client.” This includes software installation, web design, computer facilities management, software simulation and testing. It does not include the sale of software or lease of hardware.

Road freight is typically goods transported in bulk using large vehicles. This includes services such as log haulage, road freight forwarding, taxi trucks, furniture removal, and road vehicle towing. The addition of road freight to the taxable payments reporting system completes the coverage of delivery and logistics services as businesses in courier services are already obliged to report payments to contractors to the ATO.

If your business is impacted by these changes, you need to document the ABN, name and address, and gross amount paid to contractors from 1 July 2019. Your first report to the ATO, the Taxable Payments Annual Report (TPAR), is due by 28 August 2020. This might seem like a long way away but it will come around quickly and you need to ensure that your systems are in place to manage the reporting required easily and accurately.

Who needs to report?

The obligation to report contractor payments to the ATO is already quite broad. The addition of road freight, IT or security, or investigation or surveillance services, adds another layer.

For businesses providing mixed services, if 10% or more of your GST turnover is made up of affected services, then you will need to report the contractor payments to the ATO.

New laws passed by parliament last month directly target the behaviour of taxpayers that don’t meet their obligations.

Tax deductions denied

If taxpayers do not meet their PAYG withholding tax obligations, from 1 July 2019 they will not be able to claim a tax deduction for payments:

• of salary, wages, commissions, bonuses or allowances to an employee;
• of directors’ fees;
• to a religious practitioner;
• under a labour hire arrangement; or
• made for services where the supplier does not provide their ABN.

The main exception is where you realised there is a mistake and voluntarily corrected it. For example, if you made payments to a contractor but then later realised that they should have been paid as an employee and no PAYG was withheld. In these circumstances, a deduction may still be available if you voluntarily correct the problem but penalties may still apply for the failure to withhold the correct amount of tax.