1.1 The Inspector-General of Taxation’s (IGT) review into the Australian Taxation Office’s (ATO) employer obligations compliance activities was undertaken in response to concerns raised by stakeholders during public consultation for the IGT’s work program. These concerns related to complexity and uncertainty for businesses entering into contracts ‘of’, or ‘for’ services, and those providing the services being employees or independent contractors (‘contractors’) respectively (henceforth, both will be referred to as ‘workers’). The then Minister for Small Business, the Hon. Bruce Bilson MP, also expressed his support at the time for the investigation of these concerns which reflected the Government’s policy focus on reducing the compliance burden particularly for small businesses.1
1.2 The tax complaints handling function was transferred to the IGT from the Commonwealth Ombudsman on 1 May 2015. Work on this review did not commence in earnest until after this function was developed and operating smoothly. In the intervening period, given the Government’s focus on small business,2 a number of other agencies undertook work on various aspects of employer obligations and, accordingly, this review builds on their findings.
1.3 The report of this review is produced pursuant to paragraph 7(1)(f) of the Inspector-General of Taxation Act 2003.
1.4 The IGT invited and received submissions to this review from employers, workers and tax practitioners, as well as union and superannuation fund representatives. Submissions were also received from professional and industry bodies. The IGT also met with key stakeholders to gain a better understanding of the issues and identify the areas that required improvement. The concerns raised in submissions may be summarised into the following themes:
- the lack of a clear distinction between employees and contractors and the unnecessary associated costs (discussed in Chapter 2);
- the costs of compliance for employers, more generally, including various record keeping or reporting requirements under the Fringe Benefits Tax (FBT) regime, the Taxable Payments Reporting System (TPRS) and Business Activity Statements (BAS) as well as adopting new initiatives such as Single Touch Payroll (STP) and the Small Business Superannuation Clearing House (SBSCH) (discussed in Chapter 3);
- unnecessary expansion of ATO employer obligations compliance activities, inadequate use of third party data, insufficient compliance activities to create a level playing field, untargeted information requests and lack of technical expertise (discussed in Chapter 4); and
- the punitive nature of the Superannuation Guarantee Charge (SGC) rules (discussed in Chapter 4).
1.5 The IGT has also worked progressively with ATO senior management to distil potential areas for examination and to agree on specific improvements. This work has been informed by IGT review team discussions with ATO staff across a range of business units. The IGT review team also examined various ATO systems, processes and procedures to better understand concerns in this area and analysed ATO statistics which related to ATO performance and its impact on the above issues.
1.6 Before exploring the above concerns specifically, it is helpful to have an appreciation of the Australian workplace relations framework and some of the latest reviews that have been conducted in this area.
1.7 The relationship between businesses and workers is generally governed by contracts which set out the terms and conditions agreed by both parties. Where the contract establishes an employer/employee relationship, various laws import additional obligations on the parties. For example, such laws may impose obligations which regulate working conditions, restrict working hours, set minimum wages and set mechanisms to resolve disputes.3 A key piece of legislation in this regard is the Commonwealth Fair Work Act 2009 which is largely mirrored in state-based laws that may still have some application.4
1.8 The Fair Work Commission (FWC), the Fair Work Ombudsman (FWO) and Fair Work Building and Construction agency are the key national regulators of workplace relations in Australia.5 Ultimately, workplace disputes are dealt with by the Fair Work Federal Division of the Federal Court of Australia and the Federal Circuit Court.6
1.9 There are also various other institutions, such as state and territory work safety regulators, anti-discrimination bodies and the Australian Competition and Consumer Commission, which have specialist roles.7
1.10 Furthermore, the Fair Entitlement Guarantee Act 2012 established the government-funded Fair Entitlements Guarantee scheme (FEG). Where certain employee pay and leave entitlements are lost as a result of employer insolvency, the FEG pays these entitlements subject to certain limits. The FEG, however, does not provide protection for unpaid superannuation.8
1.11 Many aspects of the workplace relations framework are not intended to apply to workers who are engaged by businesses as contractors. For example, most of the protections provided under the Fair Work Act 2009 do not extend to contractors unless specifically agreed between the parties. Indeed, the sham contracting provisions of the Fair Work Act 2009 focus on protecting workers by making it illegal for a business to disguise an employment relationship as one of engaging a contractor or to threaten or mislead employees into changing their status to contractors.9
1.12 The rights and entitlements of contractors are separately protected by other legislation — primarily the Independent Contractors Act 2006 and Independent Contractors Regulations 2007. For example, an application may be made to the Courts to consider whether a contract is unfair or harsh,10 and may consider factors such as the bargaining positions of the parties, whether undue influence or unfair tactics were used, and whether the total remuneration is less than that for an employee performing similar work.11
1.13 The misclassification of workers has flow on effects which may lead to businesses and workers not fulfilling their respective legal obligations. This is discussed in the sections below.
1.14 Under common law, an employee generally enters into a contract to provide labour, a ‘contract of service’, whereas a contractor is engaged through a ‘contract for services’ to achieve a specific result.12
1.15 The ATO has published guidance on its interpretation of the common law meaning of employee in Taxation Ruling TR 2005/16. The ruling explains that there is no single factor which is determinative of the relationship. Rather, the totality of the relationship between the parties must be considered to determine whether, on balance, the worker is an employee or a contractor. While there is no exhaustive list of factors, some of the key factors for consideration are:
- the terms and the circumstances of the formation of the contract;
- the degree of control that the payer can exercise over the worker;
- whether the worker operates their own business or within the business of the payer;
- whether the substance of the contract is to achieve a specified result;
- the ability to delegate or subcontract;
- the risk borne; and
- the provision of tools and equipment.13
1.16 It should be noted that there are a number of federal and state legislative provisions that contain exclusions or inclusions to the common law definition for the purposes of establishing various employer obligations. For example, the definition is extended to include a person who ‘works under a contract that is wholly or principally for the labour of the person’ for Superannuation Guarantee (SG) purposes.14 Similarly, at a state level the definition differs and is expanded for workers’ compensation across most states.15
1.17 As a result of the above variations, there is no uniform definition that applies federally and in all states for all employer obligations. Thus, to determine their precise obligations as employers, businesses need to determine the status of each worker by considering each definition in the applicable legislation.
1.18 In addition to setting a minimum standard for working conditions, the employment relationship has been used by governments as a basis to identify which party bears the legal responsibility for fulfilling obligations which promote social policies. For example, responsibility for workers’ compensation, payroll tax, income tax withholding, and superannuation are all based on the classification of a worker. The key obligations are set out below. In complying with these obligations, employers must also deal with state and federal regulators.
1.19 Under the current workplace relations system explained earlier, employers are required to comply with the National Employment Standards, navigate various awards and agreements set by the FWC, issue payslips and keep appropriate records.
1.20 In addition to the above, state legislation may prescribe requirements for employers to have a level of workers’ compensation commensurate to the risks faced in their industry. Workers’ compensation is compulsory for employers in every state and territory except New South Wales (NSW), Victoria, and South Australia, where the requirement is subject to relatively low thresholds of wages paid.
1.21 Other legislation which impose further obligations on employers include both federal and state work health and safety legislation which require employers to maintain a suitable, safe working environment and facilities. For example, the Model Work Health and Safety Act16 places a primary duty of care on a person conducting a business to ensure, so far as is reasonably practicable, the health and safety of workers engaged, including providing the necessary information, training, instruction, and supervision.17
State tax obligations
1.22 Employers are required to register for state-based payroll taxes when total Australian wages exceeds certain thresholds. These thresholds differ depending on the state in question and are pro-rated where businesses employ workers in multiple states. While the threshold applies to total Australian wages, the tax is levied on the wages for a particular state or territory and can only be taxed in one jurisdiction.
1.23 Wages include any remuneration paid or payable by an employer to an employee for services provided with the payroll threshold applying to the total Australian wages for all grouped businesses.18
1.24 Unlike workers’ compensation discussed above, the payroll tax registration thresholds are large enough to remove the requirement for a significant number of employers. The state with the lowest threshold is Victoria, which requires registration when total Australian wages exceeds $45,833 a month or $550,000 over a financial year.19
Federal tax and superannuation obligations
1.25 In addition to their own tax obligations such as income tax, capital gains tax, Goods and Services Tax (GST) and excise tax, employers have tax obligations with respect to their workers such as Pay As You Go Withholding (PAYGW), TPRS, SG, and the FBT.
Pay As You Go
1.26 During the Great Depression, the South Australian government introduced the Pay As You Earn (PAYE) system where employers deducted tax from their employees’ pay. This system allowed income tax collection from wage earners in lower income groups which had previously been impracticable. It was also more convenient for taxpayers, created a more even flow of revenue for government and improved compliance as income was taxed at source. During the 1940s, the Federal government had expanded the PAYE system to the other states and territories.20
1.27 The PAYE system was also extended by the Prescribed Payments System and Reportable Payments System which required amounts to be withheld from payments to workers beyond employees in a number of industries.
1.28 The PAYE system continued to operate until a number of systems including PAYE were replaced by the Pay As You Go (PAYG) system on 1 July 2000.21
1.29 The PAYG system has two branches – instalments and withholding. It is under PAYGW that employers are required to withhold and remit tax from salary, wages, commissions, bonuses or allowances for employees and amounts of payments to contractors, unless an exception applies. Furthermore, the PAYG system imposes withholding obligations which include:
- labour hire arrangements;
- work or services where it is agreed that withholding will occur;
- a supply where no Australian Business Number (ABN) has been quoted;
- departing Australia superannuation payments;
- payments to foreign residents;
- payments of alienated Personal Services Income (PSI); and
- non-cash benefits.22
1.30 There is no requirement for payers to withhold where a contractor quotes a correct ABN but where an incorrect or no ABN is quoted, the payer must withhold at the highest marginal rate, comparable to an employee not providing their Tax File Number (TFN). Contractors who provide their ABN to the payer may still enter a voluntary agreement for the payer to withhold amounts from relevant payments. In this regard, where the payer would be entitled to a full GST credit, no GST is charged by the payer to align it to the tax treatment of an employee.
Taxable Payments Reporting System
1.31 The first notion of a reporting framework for workers beyond employees was the Reportable Payments System which applied to certain industries. This system was repealed and replaced by the PAYG system on 1 July 2000 as mentioned above.
1.32 To improve compliance with taxation obligations by contractors, the TPRS23 was introduced on 1 July 2012, requiring businesses in the building and construction industry to annually report payments to contractors in that industry.24 This report is called the Taxable payments annual report (TPAR) which was previously due on 21 July of each year. Concerns were raised that the closeness of this date to year-end was too onerous for businesses. As a result, from the 2014-15 financial year onwards the due date has been aligned to the quarterly activity statement lodgement date of 28 August.25
1.33 Australia’s retirement income system consists of three pillars: the Age Pension, the compulsory SG and voluntary private savings.26
1.34 In 1900, NSW introduced a means tested age pension funded from general revenue. Victoria and Queensland introduced similar schemes shortly thereafter.27
1.35 At Federation in 1901, the Australian Constitution gave the Commonwealth explicit power to legislate for the provision of old age and invalid pensions. The Invalid and Old Age Pensions Act 1908 was subsequently enacted, and the Age Pension was introduced in 1909 to provide basic income support for Australians in retirement.
1.36 To be eligible for the Age Pension an individual must be an Australian resident who is older than the qualifying age, and meet an income and assets test.
1.37 The Age Pension is the largest Commonwealth spend and has risen significantly. In 2000, it cost the Commonwealth $14 billion,28 which increased to $20 billion in 200629 and $42 billion in 2015.30 The cost is expected to rise at seven per cent each year.31
1.38 Between 1923 and 1939, there were two attempts to introduce a universal contributory national superannuation or insurance scheme to address the growing cost of the Age Pension. However, these proposals failed due to concerns, including further increasing the cost of labour, unemployment, the onset of World War II and difficulties in achieving fairness.
1.39 In the 1950s, the requirements for the Age Pension were relaxed and superannuation acted as a supplement to the pension.
1.40 As agreed under the Prices and Incomes Accord negotiated in 1985 (and the negotiation of Accord Mark II), Award superannuation was introduced in 1986. However, superannuation was still largely considered an employment fringe benefit until mandatory superannuation was introduced in 1992.32 The greatest change to superannuation since this time has been the manner in which it is taxed to reduce inequality.
1.41 In January 2015, changes to the SGC were announced to align the penalties under the Superannuation Guarantee (Administration) Act 1992 (SGAA) with the administrative penalties under the Taxation Administration Act 1953 (TAA), as well as to amend the non-deductibility of the SGC. However, these changes lapsed on 17 April 2016 when Parliament was prorogued.33
1.42 Under the SGAA, employers are required to make quarterly superannuation contributions to the fund of choice of all eligible employees unless the employee or payments made to them are excluded. The current minimum superannuation contribution for eligible employees is 9.5 per cent of ‘ordinary time earnings’.
1.43 Where employers do not pay the correct level of SG they become liable for the SGC, which, unlike SG contributions, is not tax deductible. SGC is composed of the SG shortfall, interest of 10 per cent per annum and an administration fee of $20 per employee per quarter.
1.44 There is no requirement for contractors to make compulsory superannuation payments on behalf of themselves. Contractors may make personal contributions and claim a full deduction, subject to certain conditions.34
1.45 Fringe benefits35 were previously taxable in Australia in the hands of the recipient. This was the case since the inception of the Federal income tax. Due to the difficulties in determining the value of fringe benefits and for a range of other administrative and related reasons, there was believed to be widespread
1.46 The level of non-compliance and the growing trend of remunerating employees with non-cash business benefits during the 1980s, led to the explicit taxation of fringe benefits under the Fringe Benefits Tax Assessment Act 1986 (FBTAA).
1.47 FBT is levied on employers, rather than employees, as it was believed to simplify compliance and administration.37 As a result employers became responsible for reporting benefits. This presented challenges for employers as determining eligibility for various tax offsets and benefits requires consideration at the employee level.
1.48 Under the FBTAA employers are required to pay FBT on all fringe benefits, unless they are exempt benefits. There are 12 categories of fringe benefits, each with their own definition and calculation methodology.38 The FBT year runs from 1 April to 31 March.
1.49 Where an employee receives fringe benefits above $2,000, the employer must record the grossed-up taxable value of fringe benefits, unless they are excluded fringe benefits, and report it on an employee’s individual payment summary which is due on 14 July.39
1.50 Where a worker is not an employee, the non-cash benefits that they received are not subject to the FBT. Instead the benefits are considered part of their non-cash remuneration, the market value of which is included in their assessable income.40
Personal Services Income
1.51 Whilst not an ‘employer obligation’, the PSI rules aim to address situations where ‘contractors’ provide labour which would otherwise be characterised as an employer/employee relationship.
1.52 The 1999 Review of Business Taxation (the Ralph Report) noted a significant and accelerating trend for employees to move out of simple employment relationships and become unincorporated contractors or owner-managers of incorporated companies without changing the nature of the employer-employee relationship. Such interposed entities were used to increase claims for work-related tax deductions and income allocation.41
1.53 In response, the then Government introduced the alienation of PSI legislation42 which was effective from 1 July 2000. These rules operate to tax income earned from personal services as if they were earned by employees in appropriate cases.
1.54 The interaction of the employee/contractor distinction and the PSI rules is explained in Taxation Ruling TR 2005/16:
62. Whether or not an individual is subject to the personal services income measures is distinct from and separate to the determination of whether that individual is an employee…
63. However, it is recognised that there is some overlap between the tests used to determine whether a personal services business exists, and the common law tests used to distinguish independent contractors and employees. (For example, a 'results test' is common to both.)43
Reporting and paying employer obligations
Single Touch Payroll
1.55 On 28 December 2014, a proposal was announced to ‘cut red tape’ for employers by ‘simplifying tax and superannuation reporting obligations through STP’ from July 2016 subject to consultation with businesses.44
1.56 Employers, who will be required to comply with STP, will incur certain set-up costs. They will be required to acquire new software, upgrade their existing accounting software or utilise the service of an intermediary such as an external payroll company to automatically report PAYGW and SG information to the ATO every payroll cycle.45 Employers will still be required to calculate and report other tax obligations to the ATO via activity statements but they will no longer have to produce annual payment summaries for employees for data reported through STP, provide a payment summary annual report to the ATO or lodge an activity statement for ‘in scope’ PAYGW obligations.46 In addition, TFN declarations and superannuation standard choice forms will be provided digitally to simplify the process of bringing on new employees.47
1.57 The due dates for payment for PAYGW to the ATO and SG to the respective superannuation funds will not change and will be based on the existing thresholds and legislative deadlines.48
1.58 Consultation in early 2015 examined the potential for employers to ‘remit PAYGW and SG amounts at the same time employees are paid their salary and wages’. The ‘support [that] businesses may require to enable such a transformation’ was also considered.49
1.59 After initial feedback, it was acknowledged that ‘a start date of July 2016 [would] not be achievable for many businesses’ and that ‘the cash flow implications for business of real time payments’ would present a challenge. As a result, the consultation was to proceed based on ‘real time reporting and real time voluntary payment as an option’. This means that employers will not be required to make the corresponding PAYGW and SG payments in accordance with the payroll cycle.50
1.60 During April and May 2016, the Treasury and the ATO consulted with software developers, financial institutions and clearing houses on the design of STP to help inform law design and drafting.51
1.61 On 31 August 2016, the Budget Savings (Omnibus) Bill 2016 was introduced to Parliament and proposed to amend the TAA to facilitate the requirement for STP reporting.52 It was subsequently enacted into law (STP Legislation) on 16 September 2016.53 The Explanatory Memorandum54 to the STP legislation outlines the design of STP and its intended implementation in three phases.
1.62 Phase one involves a pilot and mandatory real time reporting of PAYGW and SG along with voluntary real time payment. The pilot will be conducted from late 2016 with approximately 400 small employers with less than 20 employees55 as well as employers with 20 or more employees who wish to participate.56 The pilot is intended to include different industries and sizes including paper and electronic lodgers.57
1.63 The main purpose of the pilot is to ascertain the level of ‘deregulation benefits’ for the 710,000 small employers who have less than 20 employees and ‘test support and education tools’.58 Following the pilot, the Government will make a decision, by the end of the 2017 calendar year,59 as to whether employers with less than 20 employees will be required to comply with STP.60
1.64 Another aspect of phase one is that all employers can voluntarily commence STP reporting from 1 July 2017. The legal requirement for the use of STP for employers with 20 or more employees will take effect from 1 July 2018.61
1.65 Phase two involves sharing the payroll and employment data with other federal government agencies and phase three will extend the collection and sharing of payroll and employment data with the states and territories.62
1.66 Following the introduction of the Bill in Parliament, the ATO issued a consultation paper on the administrative aspects of STP including the circumstances for exemption from STP requirements.63 At the time of writing, this consultation is ongoing.
1.67 SuperStream was introduced as a means to increase efficiency by requiring employers and superannuation funds to transact using a standard electronic format which links data with payments. From 1 July 2016, with limited exemption, all employers will have to comply with SuperStream, however, the ATO provided flexibility in its compliance approach until 28 October 2016 for small employers that were not yet SuperStream ready.64
1.68 Compliance with SuperStream is separate from compliance with the SG regime. A decision on whether an employer is liable for SGC does not consider whether payments are SuperStream compliant.
Small Business Superannuation Clearing House
1.69 On 1 July 2010, the Government released the SBSCH as a free digital service to help employers pay SG contributions to their employees’ various superannuation funds and reduce time and paperwork associated with making SG contributions.
1.70 The SBSCH is an approved clearing house under the Superannuation Guarantee (Administration) Regulations 1993. Quarterly payments made by employers to SBSCH are treated as contributions to a complying superannuation fund.65
1.71 Access to the SBSCH was originally limited to small employers with less than 20 employees, but, from 1 July 2015, it has been expanded to employers with an aggregated turnover below $2 million.66
1.72 The SBSCH is one of a number of options available to employers to help them pay SG and which meet the SuperStream requirements. Other options include the use of employer’s default superannuation fund portal, commercial clearing houses and payroll bureaus.67 The SBSCH takes all the data and payment from the employer and distributes the data and monies to the relevant superannuation funds.
1.73 While the Department of Human Services (DHS) owns the infrastructure of the SBSCH, the administration of the SBSCH moved from the DHS to the ATO after the 2013-14 Federal Budget.68
1.74 Statistics provided by the ATO show the user profiles of employers who use the SBSCH:
- At the end of April 2016, there were 176,617 employers registered (with over 1.4 million employees) of which 76 per cent were active users as at February 2016;69
- The ATO estimates that there are approximately an additional 120,000 employers that may be potential users of the SBSCH who are yet to begin using a SuperStream compliant solution to make SG contributions;
- SBSCH profiling statistics dated 7 March 2015 show that the two main industries for active employers are ‘construction’ and ‘professional/scientific and technical services’; and
- 62 per cent of active employers had payroll software known to the ATO.70
1.75 As mentioned at the outset of this chapter, other reports have been published which are relevant to aspects of employers’ tax and superannuation obligations. The relevant aspects of these reports are outlined below.
Parliamentary Committee Inquiry into Barriers for Small Business Employment
1.76 In March 2016, the House of Representatives Standing Committee on Education and Employment published its report, Getting small business booming.71
1.77 The inquiry acknowledges the current initiatives to support small businesses and identifies additional opportunities to improve the regulatory system and reduce barriers to employment by:
- further cutting red tape;
- defining the difference between an employee and a contractor; and
- reducing the costs involved in taking on an employee, and lessening the states’ reliance on payroll tax.
1.78 The report made a number of recommendations. Those relevant to the ATO include the ATO and the FWO setting up a working group to:
- align the definitions of employee and contractor across government agencies;
- develop a single employee or contractor decision tool;
- identify any legislative changes needed; and
- consider proposals advocating for a register of building contractors.
Parliamentary Committee Inquiry into Insolvency in the Australian construction industry
1.79 In December 2015, the Senate Standing Committee on Economics published a report of their inquiry into insolvency in the Australian construction industry.72
1.80 The report noted that businesses in the industry often experience financial distress which increases the likelihood of insolvency. The structure of the industry has created an environment in which non-payment for work carried out is common place and businesses lower down in the subcontracting chain have little power relative to those at the top.
1.81 The report also noted the prevalence of deliberate phoenix arrangements, particularly by property developers, which are hard to detect. This makes it difficult for regulators like the ATO to clamp down on these types of activities. High rates of insolvency present challenges, including unpaid employee entitlements (such as SG) and tax debts (such as GST and PAYG).
1.82 The report made a number of recommendations. Those relevant to this review include that the ATO:
- increase cooperation with superannuation funds to enable early detection of non-payment of SG, which may be signs of deeper cash-flow problems, a precursor to insolvency and linked to illegal phoenix activity; and
- actively monitor the tax liabilities of businesses in the construction industry in order to ensure debts owed to the Commonwealth are paid to prevent the accumulation of unrecoverable debts.
Review of Tax Impediments Facing Small Business
1.83 In August 2014, the Board of Taxation (BoT) published a report into their Review of Tax Impediments Facing Small Business.73 The review identifies and recommends key reform priorities with the aim of reducing tax impediments facing small business and focusing on simplification and deregulation. The recommendations sought to achieve this by:
- the ATO reviewing its guidance and tools pertaining to various issues including carrying on an enterprise, PSI, the employee/contractor distinction, and transfer pricing;
- simplifying and reducing the frequency of reporting requirements for small business;
- analysing the effectiveness of the TPRS and aligning the reporting date with the 28 August BAS lodgement date;
- increasing the small business entity turnover threshold;
- assessing superannuation obligations against a quarterly threshold;
- redesigning the reporting, non-deductibility and calculation of the SGC, and replacing the penalties and administration charges with the administrative penalties regime provided under the TAA; and
- raising the minor and infrequent threshold for the FBT and investigating the possibility of aligning the FBT year to the income tax year.
Small Business Fix-it Squad
1.84 The Small Business Fix-it Squad (SBFS) is a joint agency initiative which involves small business owners working with federal, state and local government regulators and intermediaries on projects to identify and consider options for improving the broader operating environment for small businesses.74
1.85 One SBFS project was Taking on an employee – making decisions and reducing red tape. It involved a survey of small business owners75 that found there was limited:
- satisfaction with the process of taking on a new employee including the various awards and associated government regulations;
- awareness and usage of products and services available to help businesses; and
- use of electronic payroll systems.76
1.86 To address the above findings, the project group recommended:
- a whole-of-government checklist for information about employer requirements — this was released in February 2016 on business.gov.au titled ‘Taking on an employee checklist’;77
- a whole-of-government employee/contractor decision tool and a targeted multi-media awareness strategy, initially by improving the ATO tool, then assessing the next steps; and
- a tool that helps determine the tax and superannuation that applies to entitlements — this was released in February 2016 on the ATO web page titled ‘Work out tax to withhold and super to pay’.78
Promoting Compliance with Superannuation Guarantee Obligations
1.87 In June 2015, the Australian National Audit Office (ANAO) published a report of its performance audit of the ATO with respect to SG.79
1.88 The objective of the audit was to assess the effectiveness of the ATOʹs activities to promote employer compliance with SG obligations. The audit identified the administrative complexity of the SG scheme as a driver of non-compliance, particularly with small businesses.
1.89 The audit found that overall the ATO’s administration of the SG scheme has been effective, however, a greater understanding of the levels of non‐compliance with SG obligations across industry sectors and types of employers is required to more effectively promote employer compliance. The audit found that while the ATO has conducted an evaluation of the effectiveness of its SG compliance strategy at regular intervals, it was not sufficiently robust to enable a reliable assessment.
Regulator Engagement with Small Business
1.90 In September 2013, the Productivity Commission published its research report, entitled: Regulator Engagement with Small Business.80 The objective of the report was to benchmark regulator approaches to engagement with small business in order to improve the delivery of services whilst reducing unnecessary compliance costs.
1.91 The report made a number of recommendations which are relevant to aspects of this review. These include:
- clear guidance on enforcement priorities particularly where there are short-term resource constraints;
- risk-based approaches be adopted and made known to businesses;
- different treatment be considered for small businesses where it enhances the net benefits to the community;
- the diversity of small businesses should be considered so that information and advice is brief, in user-friendly language and readily available through multiple channels;
- measures be adopted to improve the timeliness of regulatory activities, such as tracking of referrals to other agencies; and
- ensure transparency and accountability in decision making, providing reasons for those decisions.
Administration of the Taxation of Personal Services Income
1.92 On 15 October 2013, the ANAO published a report of its performance audit with respect to the ATO’s administration of the PSI rules.81 The audit assessed the effectiveness of the ATO’s administration of the PSI regime including its governance arrangements, systems and processes as well as compliance strategies.
1.93 The ANAO found that PSI comprised a small proportion of the overall activity of the ATO with the program of compliance activities evolving to promote voluntary compliance with the rules. However, the report noted that the ATO could better attempt to quantify the net revenue impact of the PSI rules and the population of taxpayers that do not declare PSI. The ANAO recommended that a methodology be developed to estimate the magnitude of the potential revenue at risk, providing a baseline for comparison in the future for the assessment of the effectiveness of the ATO’s compliance activities.82
Australia's Future Tax System Review (the Henry review)
1.94 The then Government released the Final Report of the Australia's Future Tax System Review on 2 May 2010.83 The review was a comprehensive examination of state and federal taxation and superannuation systems.
1.95 One of its key recommendations was that the Government should assist people to be more aware of the retirement income system so that they are better able to manage their superannuation. Strategies put forward in this regard included:
- SG contributions should be paid at the same time as wages — this was to be introduced over time and staged so businesses could adjust their cash flows;
- employers should report superannuation contributions to their employees when a contribution is made; and
- there should be a method of linking superannuation records to such client identifiers as TFNs to ease the management of individual superannuation affairs.84
1.96 Prior to the final report, on 12 May 2009, the Review Panel released its Retirement Income Strategic Issues Paper.85 The paper recommended against extending SG to the self-employed due to the diverse and varying risks and circumstances of business and entrepreneurship. However, the Review Panel stated that it wanted to consider further the treatment of contractors within the SG system.
1.97 The paper did not recommend embedding the employee/contractor distinction in legislation for superannuation as it would set an arbitrary line and allow people to arrange their affairs to remain outside SG. It also acknowledged that the definition of an employee affects issues outside of the superannuation system.86
Review into the ATO’s Administration of the Superannuation Guarantee Charge
1.98 In March 2010, the IGT published his report of the review into the ATO’s administration of the SGC with particular focus on employees’ experiences.87 The review found that the SG system works well for the majority of Australians, but that those most at risk are employees who are incorrectly classified as contractors or are the most vulnerable in our society.
1.99 The review made a number of recommendations, including:
- better use of information and data to estimate the level of
non-compliance and impact on employees;
- improvement of the payment and information systems to allow the ATO to undertake more real time monitoring and follow-up of high risk employers;
- the ATO to engage with superannuation funds and clearing houses to obtain information to identify potential non-compliance;
- the ATO to further develop its risk identification and expand its proactive SG audit work;
- provision of appropriate and personalised letters in a timely manner to complainants about unpaid SG; and
- revision of ATO policy to impose penalties at a more meaningful level and recognise the need for appropriate remission in circumstances where the non-lodgement of SG statements was due to circumstances outside the employer’s control.
Alienation of Personal Services Income Rules: Post-Implementation Review
1.100 On 16 December 2009, the BoT published a report into their
post-implementation review into PSI.88 The aim of the review was to examine the operation of the rules to determine whether the rules are achieving their desired policy outcome and consider improvements where necessary.89
1.101 The BoT found that whilst the PSI rules had some positive impact in improving integrity and equity in the tax system, there was:
- poor compliance with the rules;
- uncertainty about how the rules interact with the general anti-avoidance rule;90
- a lack of clarity around deductions that can be claimed; and
- difficulty in applying the rules, in particular application of the tests for a personal services business and the complexity of the PAYGW obligations on attribution.91
1.102 Accordingly, the BoT made a series of suggestions to improve compliance such as introducing further reporting obligations, introducing a withholding obligation on payers, imposing a GST registration requirement and clarifying the PSI rules.92
Inquiry into Independent Contracting and Labour Hire Arrangements
1.103 In August 2005, The House of Representatives Standing Committee on Employment, Workplace Relations and Workforce Participation published its report into contracting and labour hire arrangements.93 The terms of reference included the status, range and role of labour hire and contractor engagement, consistency across states and federal jurisdictions and strategies to ensure contract arrangements are legitimate.94
1.104 The report noted that while there is difficulty in estimating the prevalence of contractors in the 20 years leading toward 2005, there had been growth in the overall numbers and proportions of contractors in Australia.95
1.105 The report made a number of recommendations, including:
- maintaining the common law approach in determining employment status and legitimate contractors;
- adopting components of the alienation of PSI legislation tests when drafting legislation to identify contractors; and
- including certain protections when drafting the legislation for contractors.96
1 Bruce Billson communication to the IGT, 19 March 2016, p 1.
2 Bruce Billson, ‘Reducing red tape burdens for small business’ (Media release, 22 October 2014).
3 Daniel Blackburn, ‘The Role, Impact and Future of Labour Law’ in International Labour Organization (ILO), ‘Labour Law: Its Role, Trends and Potential’ (Labour Education 2006/2-3, No. 143-144) p 1.
4 Australian Constitution s 109 provides that when a law of a state is inconsistent with a law of the Commonwealth, the latter shall prevail, while the Fair Work Act 2009 s 27 outlines the particular state based law (Anti-Discrimination Acts and Equal Opportunity Acts) that still applies in certain states and territories.
5 The FWO promotes workplace relations. The FWC is the national tribunal which sets minimum wages and conditions, regulates industrial action and resolves workplace disputes amongst other things. Fair Work Building and Construction is a specialist agency which promotes workplace relations in the building industry.
8 Unpaid superannuation is a ‘tax’ (via the SGC) which is subject to the recovery powers available to the ATO.
10 Independent Contractors Act 2006, s 12.
12 Commissioner of Payroll Tax (Vic) v. Mary Kay Cosmetics Pty Ltd (1982) 82 ATC 4444, per Gray J.
13 ATO, Income tax: Pay As You Go - withholding from payments to employees, TR 2005/16 (2005).
14 Superannuation Guarantee (Administration) Act 1992 (SGAA) s 12.
15 For example, Workers' Compensation and Rehabilitation Act 2003 (Qld) s 11 extends the definition of employee to include or exclude workers in particular circumstances.
16 The Model Work Health and Safety (WHS) Act forms the basis of the WHS Acts being enacted across Australia to harmonise work health and safety law.
17 Work Health and Safety Act 2010 s 19.
18 Grouped businesses include those that: (1) are defined as corporations that meet the definition of related companies provided in the Corporations Act 2001 (2) use common employees (3) are commonly controlled; and (4) are subsumed, meaning two or more smaller groups form a larger group via a common member, or members of a group together have a controlling interest in another business.
19 Payroll Tax Act 2007 (Vic), sch 1.
20 Sam Reinhardt and Lee Steel, ‘A Brief History of Australia’s Tax System’ (22nd APEC Finance Ministers’ Technical Working Group, Khanh Hoa, Vietnam, 15 June 2006) p 14.
21 The removal of these systems included the Prescribed Payments System and Reportable Payments System.
22 Taxation Administration Act 1953 (TAA) sch 1 s 12.
23 A legislative requirement under the TAA sch 1 s 405-10, and the Taxation Administration Regulations 1976 reg 64.
24 Building and construction services is defined broadly and includes a number of specific activities if they are performed on, or in relation to, any part of a building, structure, works, surface or sub-surface: Taxation Administration Regulations 1976 reg 64.
26 Commonwealth, Australia’s future tax system – Retirement income consultation paper, (December 2008) p 4.
27 Leslie Nielson and Barbara Harris, Economics Section, Parliament of Australia, ‘Chronology of superannuation and retirement income in Australia’ (1 June 2010) <http://www.aph.gov.au>; Department of the Treasury, ‘Towards higher retirement incomes for Australians: a history of the Australian retirement system since Federation’ (Economic Roundup Centenary Edition, 2001) p 67.
32 Department of the Treasury, Towards higher retirement incomes for Australians: a history of the Australian retirement system since Federation (Economic Roundup Centenary Edition, 2001) pp 74-6.
35 FBT is a tax payable by employers on the value of certain benefits (fringe benefits) that have been provided to their employees or to associates of those employees in relation to their employment. Fringe benefits include indirect, non-cash benefits provided to employees in addition to wages or salary, such as private use of a work vehicle, entertainment, discounted loans or the payment of private health insurance.
36 Australian Government, Reform of the Australian Tax System: Draft White Paper (Australian Government Publishing Service, Canberra, 1985) in Sam Reinhardt and Lee Steel, ‘A Brief History of Australia’s Tax System’, above n 20, p 12.
37 Sam Reinhardt and Lee Steel, ‘A Brief History of Australia’s Tax System’, above n 20, p 12.
40 TAA Sch 1 s 14-5.
41 Review of Business Taxation (Ralph Review), A Tax System Redesigned, July 1999, p 288.
42 Income Tax Assessment Act 1997 Part 2–42, as inserted by New Business Tax System (Alienation of Personal Services Income) Act 2000.
43 ATO, TR 2005/16, above n 13, pp 14-5.
44 Josh Frydenberg, ‘Cutting red tape for employers through Single Touch Payroll’ (Media release, 28 December 2014).
45 ATO, Single Touch Payroll Blueprint v1.3 (internal ATO document, July 2015) p 10.
46 The Treasury, Regulation Impact Statement (RIS), Single Touch Payroll (October 2015) p 13; ATO, STP Blueprint, above n 45, p 10.
47 Josh Frydenberg, ‘Cutting red tape through STP’, above n 44.
48 ATO, STP Blueprint, above n 45, p 13.
49 Josh Frydenberg, ‘Cutting red tape through STP’, above n 44.
50 Bruce Bilson, ‘Government moves to get Single Touch Payroll right’ (Media release, 10 June 2015).
53 Budget Savings (Omnibus) Act 2016.
54 House of Representatives, Revised Explanatory Memorandum, Budget Savings (Omnibus) Bill 2016, p 283.
55 ATO, Single Touch Payroll – Small Business Pilot Engagement Strategy (July 2016) p 7.
56 ATO, ‘Single Touch Payroll Program Phase 1’ (Paper presented at the Business Engagement Forum, Sydney, 23 March 2016) p 4.
57 ATO, ‘Single Touch Payroll – Business Pilot Project Overview’ (internal ATO document) p 3.
59 The Treasury, RIS, STP, above n 46, p 39.
60 ATO, STP Pilot Project Overview, above n 57, pp 2-3.
61 Budget Savings (Omnibus) Act 2016 sch 23, div 3, item 22.
62 The Treasury, RIS, STP, above n 46, p 29.
64 ATO, ‘Flexibility for small business to become SuperStream compliant’ (Media release, 22 June 2016).
65 Superannuation Guarantee (Administration) Regulations 1993 s 7AE and SGAA 1992 s 23B, s 79A.
68 The Commonwealth of Australia, ‘Mid-Year Economic and Fiscal Outlook 2013-14’ (December 2013) p 192.
69 114,000 of the 150,000 registered users as at February 2016.
70 ATO communication to the IGT, 9 March 2016.
71 Standing Committee on Education and Employment, Parliament of Australia, Getting business booming, Report on the inquiry into barriers for small business employment (March 2016).
72 Economics References Committee, Parliament of Australia, 'I just want to be paid' Insolvency in the Australian construction industry (December 2015).
73 BoT, Review of Tax Impediments Facing Small Business (2013).
75 Of the 2865 businesses the survey was delivered to, 381 commenced the survey and 320 completed the survey.
76 Corporate Research Centre: Community insights and solutions, Small Business Fix-It Squad Survey, ATO (June 2015) p 3.
79 ANAO, Promoting Compliance with Superannuation Guarantee Obligations, Audit report No.39 2014–15 (June 2015).
80 Productivity Commission, Regulator Engagement with Small Business, Research Report (September 2013).
81 ANAO, Administration of the Taxation of Personal Services Income, Audit Report No.5 2013–14 (October 2013).
82 Ibid pp 17-25.
83 Australia’s Future Tax System (Ken Henry, chairperson), The Treasury, Final report: Part 1 – Overview (AGPS, 2009).
84 Ibid p 86.
85 Australia’s Future Tax System (Ken Henry, chairperson) The Treasury, Retirement income consultation paper (December 2008).
86 Australia’s Future Tax System (Ken Henry, chairperson), The Treasury, Final report: Part 2 - Detailed Analysis - Volume 1 (AGPS, 2009) pp 130-1.
87 IGT, Review into the ATO’s administration of the Superannuation Guarantee Charge (March 2010).
88 BoT, Post Implementation Review into the Alienation of Personal Services Income Rules (2009).
89 Ibid p 6.
90 Income Tax Assessment Act 1936 pt IVA.
91 BoT, Post Implementation Review of PSI, above n 88, p 25.
92 Ibid pp 29-39.
93 Standing Committee on Employment, Workplace Relations and Workforce Participation, House of Representatives, Making it work: Inquiry into independent contracting and labour hire arrangements (August 2005).
94 Ibid p 2.
95 Ibid p 7.
96 Ibid p xxi.