IT service businesses have just months to update their processes to comply with an expanding Australian Taxation Office (ATO) auditing program that has already clawed back more than $2.7 billion from tax-dodging building and construction firms.
A key part of the ATO’s Black Economy Taskforce, the Taxable Payments Reporting System (TPRS) requires companies that engage contractors to keep detailed records of all funds paid to those contractors during the tax year, and report them to the ATO by August of the next year.
The clampdown on building and construction firms began in the 2012-13 tax year and has been so successful that the TPRS was last year expanded to other “high risk” industries such as couriers and cleaning service providers, who will lodge their first taxable payments annual report (TPAR) with the ATO this August.
IT services firms – along with road freight services and security, investigation, or surveillance firms – must track detailed contractor payment data from July 1 this year, with their first TPAR due on 28 August 2020.
What you need to do
All IT services firms will need to track contractor payments if they derive at least 10 percent of their GST turnover from the provision of IT services.
Required information includes contractors’ Australian Business Number; name and address; and the gross amount paid to the contractor during the financial year, including GST.
The system is back-ended by sophisticated data-matching technology that compares declared contractor payments with the payments contained within bank data and a host of other third-party data sources.
Significant variations are flagged for follow-up, with intentional underreporting of income by contractors punishable by fines.
The ATO defines IT services as “the provision of expertise in the field of information technologies such as writing, modifying, testing or supporting software to meet the needs of a client; or planning and designing computer systems that integrate computer hardware, software and communication technologies.”
The definition excludes companies that are mass-producing computer software; leasing or hiring computers where there is no customisation or software development performed; providing data processing services; or installing computer cables.
IT-services firms don’t need to report payments for materials; invoices unpaid at the end of the financial year; PAYG withholding payments; payments within consolidated groups; or payments made by individuals for private or domestic reasons.
Small-business reporting burden
Expansion of the program – telegraphed by the ATO last July – is a part of the agency’s ongoing efforts to claw back tax revenues from firms that have under-reported their payments to reduce their tax payable.
The ATO has argued that, as well as depleting national coffers, the $50b black economy is damaging competition by preventing Australian businesses from winning bids against rivals that don’t comply with taxation law.
Yet accountancy firms were urging a cautious approach as the TPRS is expanded, with concerns that many companies still unaware of their new obligations and many others lack the systems and processes to meet them.
Chartered Accountants Australia has urged the government to provide amnesty for contractors that realise they have underpaid in previous years.
Contractor industry association Self Employed Australia has been vocal about its concerns over the ATO’s “audit system of considerable incompetence”.
The organisation welcomed measures to support small businesses, such as the looming Small Business Tax Tribunal that will take effect from March 1.
The start of this month saw the close of submissions on a draft Law Companion Ruling that outlines the terms of the expanded program and obligations for firms in different industries.