To maintain a strong economy and achieve Government objectives, including provision of services to its citizens, revenue needs to be raised through taxation of businesses and individuals. In addition to complying with their own taxation obligations, businesses, and not-for-profit organisations, have to play a vital role in collecting taxes from their employees as well as ensuring that employee entitlements such as superannuation payments are made.
Furthermore, employers have to comply with a multitude of other taxation and legal obligations both at the Federal and state levels. As a result, it is important to provide them with as much support as possible with these obligations so that their primary focus continues to be their core commercial goals. The health of the Australian economy is, to a large extent, dependent on their efficiency and profitability.
This review is aimed at assisting employers to comply with their obligations under the superannuation, Pay As You Go (PAYG) withholding and Fringe Benefits Tax (FBT) regimes.419 Opportunities will be sought to ease their compliance burden whilst ensuring that the relevant taxes and superannuation entitlements are paid promptly. In this respect, the Australian Taxation Office (ATO) has been undertaking a number of initiatives, such as ‘Single Touch Payroll’, to reduce employers’ reporting requirements.420
Approximately 97% of businesses are identified as small businesses with a turnover of $2 million or less.421 Accordingly, the review will need to consider the challenges faced by small businesses, particularly in meeting the above obligations. It should be noted that the Government has already implemented a joint agency initiative called the Small Business Fix-it Squad which involves small business owners working with Federal, state and local government regulators to identify and consider options for improving the broader operating environment for these businesses.422
The ATO reports that around half of the taxation revenue collected, which totalled $419.26 billion in 2013-14, flows through approximately 846,500 employers.423 This revenue amount includes PAYG withholding and Superannuation Guarantee Charge (SGC). In 2014-15, employers remitted Superannuation Guarantee (SG) of more than $79.19 billion to employees’ superannuation funds.424 SG is an important element of the broader taxation and superannuation system where non-compliance adversely impacts retirement savings resulting in increased reliance on the aged pension as well as an uneven commercial playing field.
The ATO also utilises employer reporting and taxable payments to certain contractors,425 to verify employee/contractor compliance with their own obligations. In addition, the ATO uses such information in the prefilling of income tax returns. Other Government agencies benefit directly or indirectly from this employer reporting as well, for example, managing social security and child support obligations.
During the Inspector-General of Taxation’s (IGT) work program consultations, a broad range of stakeholders raised particular concerns regarding the ATO’s approach to employer compliance with taxation and superannuation obligations. These concerns included:
- Difficulty and uncertainty in determining employee or contractor status. For example, unexpected multi-year liabilities may arise for employers as a result of an audit or otherwise genuine employees may be left without an avenue to pursue their unpaid entitlements. Similar status challenges may have led to the increase from 13,696 in 2008-09 to 50,358 in 2013-14 (with a peak of 59,885 in 2012-13) in the number of Australian Business Number (ABN) applications being rejected by the ATO.426
- SG non-compliance due to difficulties in ATO detection and enforcement as well as limited ability of employees to take direct action for unpaid SG. There is also a lack of ATO feedback to employees who report potential employer non-compliance. In the last five financial years, the ATO has raised a total of $2.97 billion in unpaid SG liabilities and collected a total of $1.59 billion.427 Further liabilities may remain undetected as the ATO relies more on employee notifications than proactive risk-based audits.428
- Unnecessary compliance costs for employers arising from ATO conduct during compliance activities. These include onerous information requests to employers, Director Penalty Notices (DPN) being issued in inappropriate circumstances, unwillingness to discuss issues and practical solutions.
- Aspects of the penalty regimes, particularly with respect to SGC, not adequately promoting voluntary compliance or self–reporting of non-compliance. However, it should be noted that the Government has recently concluded consultation on proposed legislation to simplify and reduce the harshness that may result from imposition of interest and penalties with respect to SGC.429
There are certain arrangements, known as ‘phoenix’, which involve companies being deliberately placed into administration or liquidation, leaving taxes and employee entitlements unpaid. This review will also examine the effectiveness of ATO actions to address these phoenix activities. It should be noted that the Government has established an Inter-Agency Phoenix Forum to share intelligence and implement cross-agency strategies to reduce and deter phoenix activity.430
The IGT will conduct this review pursuant to subsection 8(1) of the Inspector-General of Taxation Act 2003 (IGT Act) and welcomes your input. The following terms of reference and guidelines are provided to assist with the preparation of your submission.
The IGT review into the ATO’s employer obligations compliance activities will focus on:
Easing the compliance burden for employers
- The distinction between ‘employee’ and ‘contractor’ for Federal taxation and superannuation purposes, its coherence with business practices, state taxation and other legal requirements as well as the interactions with ABN and GST registrations.
- Simplification of reporting, withholding and payment obligations for employers as well as certain contractors.
- The effectiveness of the ATO’s use of existing third party data to reduce the compliance burden for employers.
- Guidance and tools for employers to discharge their employee-related taxation and superannuation obligations, including the level of protection afforded to those relying upon the information provided.
- Information and support for employees to understand their rights, entitlements and avenues for redress where they become aware of potential non-compliance by their employers.
ATO conduct of compliance activities
- The effectiveness of the ATO’s risk assessment and verification processes to detect and address non-compliance of employer obligations in a timely manner.
- The ATO’s consideration of relevant employee entitlements protection and business viability impacts when undertaking compliance actions.
- The effectiveness of the ATO’s actions to address phoenix activities.
- The ATO’s conduct during employer obligations compliance activities, including the:
- proportionality and use of information gathering powers;
- access and use of available third party information to verify compliance;
- appropriateness of auditor communications;
- pathways for escalating and resolving issues before such activities are finalised;
- sustainability of audit and penalty decisions;
- costs for employers and employees; and
- the feedback given to employees who notify the ATO of potential employer non-compliance.
- The ATO’s administration of alienation of personal services income provisions and its interaction with other compliance activities including those relating to employer obligations.
- The extent to which aspects of the administrative penalty regimes encourage or hinder voluntary compliance and self-reporting of non-compliance by employers.
The IGT may also examine other relevant concerns raised or potential improvements identified during the course of this review.
We envisage that your submission will set out your experiences and views on the ATO’s management of employer obligations compliance activities.
It is important to provide detailed accounts of your experiences with the ATO. A timeline outlining your major interactions with the ATO, including key correspondence, formal notices and related outcomes would be helpful. Your submission should address the terms of reference above.
In addition to your views on potential improvements, we are also seeking examples of ATO approaches that have contributed to positive experiences or outcomes.
The following questions may assist you in your response.
Easing the compliance burden for employers
Q1. What is your experience with the employee/contractor distinction for taxation and superannuation purposes? Does it reflect your business practices and how does it compare with state taxation and other legal requirements? Can the employee/contractor distinction be improved for all parties? If so, how?
Q2. As an employer, what are the business pressures that impact on your decision to engage an individual as a contractor or an employee? Provide an account of your experience.
Q3. As an individual, what are the business and personal pressures that impact on your decision to be engaged as a contractor or employee? Provide an account of your experience.
Q4. Have you had any experience in dealing with the ATO regarding the employee/contractor distinction, including for ABN and GST registration purposes? Were they able to sufficiently clarify areas of uncertainty? Were any third parties impacted by the ATO’s determination?
Q5. Do you believe the documentary evidence required to substantiate employee/ contractor status is reasonable and easily produced? Explain your views.
Q6. Do you believe that the ATO’s publicly available guidance and tools for determining worker status (for example, the employee/contractor decision tool) are clear and provide a sufficient level of protection?
Q7. Are there ways in which guidance and tools for employers can be improved more generally to assist them in discharging their employee and contractor related taxation and superannuation obligations? Explain your views.
Q8. Are there ways in which the employer’s reporting and payment obligations with respect to their employees and contractors can be simplified without jeopardising the payment of taxes and superannuation entitlements? Explain your recommendations and provide reasoning.
Q9. Did the ATO use third party data in its risk assessment? If so, did the use of this data reduce your compliance burden?
Q10. Are there are other improvements that can be made to ease your compliance burden in relation to your PAYG withholding, FBT and SG obligations?
ATO conduct of compliance activities
Q11. Have you had experience with the ATO’s compliance activities relating to PAYG withholding, FBT and SG including penalty matters such as unpaid PAYG and SG penalties? If so, provide a detailed account of your experience, including:
- A timeline of key events and a description of the actions taken by the ATO.
- The effectiveness of the ATO communication throughout the compliance activity including reasons for why you were selected.
- The use of available third party data to verify compliance.
- Your views on whether ATO actions, including information requests, were appropriate and commensurate with the circumstances, the risks to the revenue and unpaid employee entitlements. What were the impacts of such actions on you?
- Where the ATO identified an error, did it take into account appropriate mitigation factors, such as your compliance history for remission of penalty and interest?
- Where there was a disagreement, did the ATO initiate and engage in alternative dispute resolution with you? What were your views on the process and the outcome?
- Comment on the reasonableness of any assistance that the ATO made available to you, such as payment arrangements, interest remission, guidance and support.
Q12. If you disagreed with the ATO’s decision following an employer obligations compliance activity, what was your experience? Which avenues of review or appeal (if any) did you pursue? Provide a detailed account of your experience including:
- whether the ATO clearly explained to you the escalation/review pathways;
- whether the ATO attempted to narrow the issues in dispute and facilitate resolution in order to minimise cost for all parties; and
- the outcome of the disagreement.
- If you were issued with a DPN for SG or unpaid PAYG, what was your experience with the ATO? Explain your views, in particular:
- whether you had adequate opportunity to engage with the ATO to discuss concerns prior to the issue of the DPN;
- whether the ATO adequately explained to you the DPN and the reasons for issuing the notice;
- whether the DPN was issued for correct reporting periods and amounts;
- if you sought independent advice, whether it led you to a particular action, such as entering into voluntary administration; and
- if there was a dispute regarding the DPN, how it was resolved.
Q13. Was alienation of personal services income part of the scope of ATO employer obligations compliance activities in which you were involved? If so, explain your experience and the impact. Are any improvements required including the need for more guidance and tools as to their application and the ATO’s administration of these provisions?
Q14. At a broader level, how effective is the ATO’s approach to detecting, prioritising and enforcing compliance with the PAYG withholding, FBT and SG obligations? Explain your views and provide any supporting examples.
Q15. How effective are the ATO strategies for improving employer compliance with their obligations over time? In particular, what improvements can be made to its detection and enforcement of these obligations? Explain your suggestions.
Q16. How could the ATO give greater consideration to the protection of relevant employee entitlements and impact on business viability when undertaking a compliance action?
Q17. How should unpaid SG amounts be managed? How would your idea be funded? A legislative scheme exists for unpaid wages and leave entitlements when an employer goes into liquidation or bankruptcy. Should SG entitlements be included in this scheme? Explain your views.
Q19. How could the ATO give greater consideration to the protection of relevant employee entitlements and impact on business viability when undertaking a compliance action?
Q20. How should unpaid SG amounts be managed? How would your idea be funded? A legislative scheme exists for unpaid wages and leave entitlements when an employer goes into liquidation or bankruptcy. Should SG entitlements be included in this scheme? Explain your views.
Q21. What are the impacts on employers and employees over time as a result of ATO compliance actions? What were the effects on the business for employers and, for employees, how would their retirement savings be impacted over the longer term? Explain your views.
Q22. How effective are the ATO’s actions to detect and address ‘phoenix’ activities and recover relevant employee entitlements? Where you believe improvements are necessary, provide reasons and explain the improvements that you recommend.
Q23. Are there aspects of the administrative penalty regimes that may be improved to promote voluntary compliance and self-reporting of non-compliance by employers? Explain your suggestions and reasoning.
Q24. If you are an individual who reported potential non-compliance of an employer to the ATO, what was your experience? How easy was it to lodge your report? Do you believe the ATO response was appropriate?
Q25. Are there ways the ATO could improve its interaction with individuals reporting potential non-compliance of their employer, including initial notifications and follow up thereafter?
Q26. Have you had any positive experiences in dealing with the ATO in relation to employer obligations compliance activities? Provide examples.
Q27. Are there any other areas on which you would like to make a submission? For example, you may wish to cite international experiences or comparisons which you believe would lead to improvements.
The closing date for submissions is 11 December 2015. Submissions can be sent by:
Inspector-General of Taxation
GPO Box 551
SYDNEY NSW 2001
Submissions provided to the IGT are in strict confidence (unless you specify otherwise). This means that the identity of the taxpayer, the identity of the adviser and any information contained in such submissions will not be made available to any other person, including the ATO. Section 37 of the IGT Act safeguards the confidentiality and secrecy of such information provided to the IGT — for example, the IGT cannot disclose the information as a result of a court order generally. Furthermore, if such information is the subject of client legal privilege (or legal professional privilege), disclosing that information to the IGT will not result in a waiver of that privilege.
420 Josh Frydenberg, ‘Cutting red tape through STP’, above n 44.
424 Australian Prudential Regulation Authority, Quarterly Superannuation Performance (20 August 2015) p 10.
426 Commissioner of Taxation, Annual Report (2008-09) p 50; Australian Business Register, Report of the Australian Business Registrar 2012-13 (November 2013) p 80; Australian Business Register, Report of the Australian Business Registrar 2013-14 (November 2014) p 74.
427 Commissioner of Taxation, Annual Report (2013-14) p 68; Commissioner of Taxation, Annual Report (2011-12) p 89; Commissioner of Taxation, Annual Report (2009-10) p 105.
428 IGT, Review into the ATO’s administration of the Superannuation Guarantee Charge (March 2010) pp 48-54.
430 Taxation Administration Regulations 1976 reg 48.