3.1 Commentators generally recognise that modern tax systems, particularly because of their self-assessment nature, impose significant costs on taxpayers in complying with their tax obligations. These costs may be particularly high for small businesses relative to their turnover, income or the number of employees.160
3.2 Small businesses form the largest group of business in Australia. A Department of Treasury report shows that those with annual turnover less than $2 million account for the largest share of tax compliance costs, at $18.7 billion in 2011, compared with all other market segments. These costs mainly related to those associated with record keeping and external fees.161
3.3 The Treasury report also estimated the compliance costs in relation to SG and PAYGW to be $2.6 billion and $1.1 billion respectively for all market segments. The compliance cost for the FBT was relatively small, however, both the Treasury and the BoT were of the view that the model used had delivered too low an estimate and that such costs may have been captured elsewhere such as in the total cost for external professional fees162 which were separately estimated to be $14 billion with respect to all taxes.163 Similarly, the costs in relation to PAYGW may also be higher— the ATO has estimated it to be approximately $2.5 billion in 2011.164
3.4 Stakeholders have raised concerns that a number of employer obligations impose significant compliance costs particularly for small businesses. These costs include those related to record keeping and reporting obligations.
3.5 Stakeholders have acknowledged that a number of initiatives have been introduced with the goal of reducing compliance cost for businesses. However they have raised concerns that this goal may not be fully achieved with respect to some of these initiatives. For example, they believe STP will not be sufficiently tested before going live and barriers to its adoption, particularly by small business, have not been adequately considered. Another example is the requirement by SBSCH to manually enter SG data.
3.6 Some stakeholders have also raised concerns in relation to the extent of GST reporting required in BAS and the different lodgement dates for BAS and TPRS forms. The IGT notes that these lodgement dates have now been aligned to 28 August from the 2014-15 financial year. More generally, GST is not being considered in this review as it is not connected with employment, however, should these concerns persist they may form part of a more targeted review.
3.7 As described in Chapter 1, the aim of STP is to cut red tape for employers by simplifying tax and superannuation reporting through software which will automatically report payroll information to the ATO.
3.8 Stakeholders have raised concerns that STP may not significantly reduce compliance costs for employers due to a number of issues, including:
- the ATO has not worked adequately with third party software developers to mitigate design and implementation risks such as minimising compatibility or interaction issues of their software with ATO systems;
- no provisions have been made for late reporting by employers due to STP system issues;
- there may be additional compliance costs if the existing PAYGW related reporting obligations are not removed;
- implementation costs may be an adoption barrier, particularly for small employers, despite the proposed funding mentioned in Chapter 1; and
- no provisions or alternatives have been made for employers who do not have access to a reliable internet connection or are unable to use technology.
Relevant ATO materials
Design and implementation
3.9 The ATO has produced a blueprint outlining the STP design. In relation to STP software development, it states that the ATO will facilitate discussions with software developers, employers and intermediaries to determine standards and minimum requirements.165
3.10 The ATO has also prepared a Regulation Impact Statement (RIS) for Parliament which outlines the design, savings and potential impact of STP. To mitigate concerns about the ATO’s level of engagement with software developers, the RIS states that the ATO will draw upon established networks in the design and implementation of STP.166
3.11 The ATO has advised that it expects that development of STP software will follow its usual process167 where the ATO publishes a set of specifications in accordance to which software developers produce the final product.168 Following a self-certification process,169 the name and version of the final product is published on the ATO’s software developers’ webpage.170 The ATO has also advised that while it does not endorse171 or conduct testing of the final product to ensure that the specifications are met,172 it does allow developers to test it with a small set of data once it goes live.173
3.12 In addition to the above standard process, the ATO has provided management representation that it has a test strategy to manage the implementation of STP software but is unable to provide documentation, at the time of writing, as it is ‘still under development and is contingent on the final design’.174
3.13 The STP legislation also allows employers to correct mistakes without penalty within two weeks after the end of the financial year to which the report relates.175 Furthermore, a failure to notify the ATO of the amounts required by STP will not attract a penalty until 1 July 2019176 or any later date as determined by the Commissioner.177 In this later respect, the ATO is seeking feedback from the community on an appropriate date and whether other materiality thresholds should apply, for example, the maximum values for correction of such errors.178
3.14 Under the STP legislation, employers who comply with STP will not be required to meet a number of reporting obligations, including the need to provide annual reports and annual and part-year payment summaries.179 As part of relieving employers from the requirement to provide payment summaries, the ATO has advised the IGT that it plans to provide payment summaries to employees who are not able to register to myGov.180 The ATO has not indicated when this service would be operational.
3.15 The ATO has also advised the IGT that it will use STP data to prefill the W2 label (amounts withheld for salary/wages) on BAS from 1 July 2017 but will allow employers to verify the amount prior to submission.181
3.16 It should also be noted that the RIS states employer reporting may be further reduced, in the long term, when STP is able to facilitate the sharing of real time payroll data with federal, state and territory government agencies.182
Adoption of STP
3.17 As mentioned earlier in Chapter 1, employers will incur STP implementation costs such as acquiring new software, upgrading existing software or engaging the services of an intermediary. The extent of implementation costs will vary between employers with those already using digital systems for PAYGW being ‘potentially well aligned’ with the STP.183 However, small employers, particularly those without digital systems, will have proportionately larger implementation costs.184
3.18 The ATO has estimated the total implementation cost for employers to be $300 million185 over a two to three year period. This estimate is based on mandated adoption by all large employers and voluntary adoption by 30 per cent of small employers.186 If the Government decides to include small employers into STP, the total implementation cost for all employers will increase to approximately $670 million over a two to three year period.187
3.19 It is estimated that there will be $135 million in annual savings and $900 million in net compliance cost savings over 10 years based on mandatory adoption of STP by all large employers and 30 per cent voluntary adoption by small employers. Mandatory adoption by all employers is estimated to provide annual savings and net compliance cost savings of $295 million and $2 billion respectively. These savings are expected to be generated by ‘record keeping improvements’ from the streamlining and automation of the withholding process with further savings from the new TFN declaration and superannuation standard choice forms.188
3.20 In the event that there is an insufficient availability of affordable software for employers, the ATO had identified that the effective implementation of STP could be at risk and, as a contingency, the ATO would ‘look to fund the development of a low or no cost solution’ to mitigate this risk.189
3.21 Other employers, who may have difficulties complying with STP, include those in remote locations or those who otherwise face challenges accessing the internet. At the time of writing, it seems that the only way in which the ATO intends to address these challenges is by exempting such employers from STP requirements.
3.22 The STP legislation allows the Commissioner to exempt a class of employers or particular employers from STP requirements.190 An ATO consultation paper indicates that the Commissioner will consult on the circumstances under which an employer may be exempt including situations where employment is on a seasonal basis.191
3.23 In addition to wealth generation and employment, employers play an important role in collecting and paying taxes on behalf of their employees. The ATO has reported that almost half of the $419.26 billion taxation revenue in 2013-14 was collected by approximately 846,500 employers.192 This comes at a cost for employers. For example, as mentioned above, the SG compliance costs for employers across all market segments has been estimated to be $2.6 billion,193 collectively they issue 1.9 million annual paper payment summaries to employees and complete approximately 1.6 million PAYGW-only activity statements each year.194
3.24 Unnecessary regulatory costs do not contribute to economic output and can actually be a form of disincentive to employers, which can in turn affect potential employment opportunities for employees. Accordingly, it is important that such costs be carefully considered and minimised to the extent possible.
Design and implementation of STP
3.25 One initiative aimed at reducing employers’ compliance burden is STP. It is intended to provide substantial benefits, however, there are risks associated with its implementation and management. The ATO has sought to mitigate these risks through a staged implementation approach including an initial voluntary adoption by any employer with STP-enabled software as well as a pilot to assess suitability for small employers.
3.26 STP is still in the ‘co-design’ phase and implementation strategies are being formulated. In designing and implementing STP, it is crucial that the ATO applies the key principles of change management, such as clearly articulating the change and the ‘future state’, consulting with relevant stakeholders early and conducting testing on the software and its interaction with other systems. The IGT notes that the staged implementation approach being used by the ATO accords with the key principles of change management.
3.27 Stakeholders have raised concerns that there is significant risk that the software, being developed by third parties, may not allow employers to fully discharge their legislated obligations particularly due to compatibility with ATO systems. The ATO is seeking to minimise this risk by providing minimum specifications for the software and engaging the same developers that it used in the SuperStream initiative.195 Engaging with the relevant software providers for STP early in the design process will help to ensure ‘buy-in’ and provide adequate lead time for them to make the necessary changes to their products and conduct adequate testing.
3.28 Whilst the particular details on the design and testing of STP, including the pilot, is not settled, it is commonly accepted that large scale changes to information technology systems should include end-to-end testing (for example, from employer systems to ATO systems) of data in test and production environments. This should include testing the system under a number of scenarios including load and stress testing of ATO internal systems to ensure readiness to accept the expected volume of messages. Such testing is particularly important because STP will not operate in isolation of other ATO systems and may eventually be integrated with reporting systems of other agencies, for example, the DHS in relation to child support.
3.29 The ATO’s management has advised that the details regarding the testing process are not available as the design is not yet final, including whether testing will occur in a controlled testing environment.
3.30 The IGT is of the view that while the ATO is in the development stage, the testing methodology needs to be incorporated in the software developers’ design. The product needs to be rigorously tested in both test and production or ‘go live’ environments with ATO systems prior to STP becoming mandatory.
3.31 As part of the testing process, the ATO should clearly communicate to software developers that before they are permitted to use the test environments, they should meet an ‘entry criteria’. This criterion requires base-level software being developed which has already been subjected to a certain level of testing. In addition, they should also be informed of the ‘exit criteria’, that is, the performance level that the product must meet before progressing to a ‘go live’ environment.
3.32 The above testing process was facilitated by the ATO in the development of SuperStream. It is designed to identify any defects for early rectification and is particularly important where a number of parties are involved in a complex system with integrated reporting and potential funds transfer. Software developers and employers will also welcome such an approach. It will provide a degree of assurance that the third party software product operates and interacts with ATO systems as intended in a controlled setting before ‘go live’ occurs in a pilot which will then be followed by normal operations. This increased level of confidence in the product should encourage the voluntary uptake of STP.
3.33 Those software developers that successfully complete the entire testing process with ATO systems should receive appropriate certification from the ATO. Such certification would be the ‘gold standard’ for assuring employers and other user groups that the software is robust, reliable and allows them to fulfil their statutory obligations more efficiently.
3.34 The above testing process and the gold standard certification for the third party software was an important part of the success of the SuperStream which affected a similar population. In this instance, the ATO created a ‘SuperStream certified product register’ which only contained software developers who could demonstrate that their product met the required specifications and minimum standards. The ATO even sought to go further by ensuring that developers received direct feedback via a ratings process to ensure users were fully informed of the software’s functionality. Such transparency and support is to be commended.
3.35 The ATO may be faced with a considerable workload if the number of software providers requiring certification is much larger than was the case with SuperStream. However, without ATO certification, a significant risk remains that
‘self-certified’ software may not meet the required standard. Given the large-scale nature of STP and the longer term benefits anticipated, the IGT believes certification by the ATO has to be a key aspect of STP implementation.
3.36 Even where comprehensive testing and certification may have occurred, as with any new system, unexpected problems may arise, particularly in the early stages of release. These problems may impact on an employer’s ability to comply with the STP requirements and expose them to the risk of penalties. The STP legislation addresses such risks by allowing the ATO to take a concessional approach to penalties in the first 12 months of operation.196 The IGT notes that this is one of the issues being considered by the ATO in its consultation with the community on how STP will be administered.197
3.37 The IGT believes that, in addition to assuring employers of the reliability of the software and taking a concessional approach to penalties during the early stages of implementation, it is important that the ATO should promote the benefits of STP to employers. Following the commencement of this review, the ATO has now developed a plan to pre-fill the relevant labels on BAS and is looking to provide payment summaries to employees.198
3.38 The IGT is also of the view the ATO should seek further opportunities to utilise STP data to pre-fill amounts for employers which are required to be reported elsewhere, including amounts reported to other government agencies.199 The reduction of these reporting requirements will be vital to the voluntary uptake of the STP and its ultimate success.
Adoption of STP
3.39 Stakeholders indicated that there are a number of barriers to employers adopting STP. The substantial upfront cost of purchasing or upgrading their software is one such barrier. Employers may also face technological barriers where they do not operate in a digital environment or do not have a reliable internet connection. These barriers are not limited to the adoption of STP but apply more broadly to the ATO’s move to digital services.
3.40 In cases where employers face particular challenges in complying with STP, the IGT notes that the STP legislation allows the Commissioner to exempt particular employers or classes of employers from meeting those requirements. Therefore, the Commissioner is able to exempt qualifying employers where, for example, they face technological challenges. With regard to the upfront cost of purchasing STP software, the Government announced a $100 tax offset to assist small employers.200
3.41 As stated earlier, the legislation provides an exemption from the adoption of STP to employers with less than 20 employees. Stakeholders have identified that further exemptions are necessary and that these should be provided by the Commissioner exercising the discretion afforded to him by the legislation. The IGT is of the view that appropriate exemptions should be provided particularly in the transition period and that the appropriate channel for identifying such exemptions is the ATO’s current consultation on administering the STP legislation.
3.42 Whilst appropriate exemption would be of considerable relief for affected employers, the RIS does state that the benefits and efficiencies anticipated from the successful implementation of STP can only be realised through ‘full participation by all businesses’.201 Therefore, the IGT believes that whilst exemptions are necessary in the short term, the ATO should explore alternative ways whereby exempt employers can adopt STP in the long term so that they too can reap the expected benefits as well as the tax system as a whole.
3.43 One alternative would be to offer a low or no cost option to mitigate the current upfront costs which are a barrier for a considerable number of employers including 56 per cent of small employers who do not currently have electronic payroll software.202
3.44 As mentioned earlier, the ATO has stated that it would consider funding the development of low or no cost STP software as a contingency if it does not become commercially available.203 The IGT also notes that the New Zealand Inland Revenue is currently implementing an initiative similar to STP and is working with software developers to investigate the production of a low or no cost solution.204
3.45 The IGT believes that the ATO should also explore the provision of a low or no cost solution as a means of encouraging voluntary uptake of STP by small employers, for example, by expanding the use of the SBSCH as a platform for employers to meet STP requirements.
3.46 The IGT also believes that the ATO should provide insight and raise awareness of employers that the upfront implementation costs would be outweighed by the long-term savings particularly for those in a position to meet such costs.
3.47 Another alternative way of adopting STP, particularly for those with technological challenges or lack of a reliable internet connection, is for the ATO to provide the digital connection. In this respect, the IGT notes that, in New Zealand, consideration is being given to providing digital access to government services through the use of physical ‘e-kiosks’ for taxpayers without internet access.205 The IGT believes that the ATO could explore similar options in Australia such as e-kiosks at Australia Post outlets.
The IGT recommends that, in relation to Single Touch Payroll, the ATO:
- apply the learnings from the implementation of SuperStream and, in particular, ensure that there is rigorous testing of third party software with certification being provided to those that meet all requirements;
- seek to reduce employers’ reporting requirements by using the information obtained to prefill fields;
- ensure that there are appropriate exemptions at least in the short-term whilst exploring the possibility of providing:
- a low or no cost software for qualifying small employers; and
- an alternative method of electronic access for employers facing technological challenges, through such means as e-kiosks.
Agree with recommendation 3.1(a).
Agree with recommendation 3.1(b).
Disagree with recommendation 3.1(c) (i).
Disagree with recommendation 3.1(c) (ii).
The recommendation implicitly acknowledges the successful work that has been undertaken by the ATO in implementing Superstream. We have been keen to ensure that the lessons learned through the Superstream implementation are taken into account in implementing Single Touch Payroll and for this reason have joined the Superstream and Single Touch Payroll projects under single leadership. Our intent is to continue to ensure the Superstream lessons are taken into account as appropriate, as well as the lessons from other software related implementations such as the new practitioner lodgement service, acknowledging that each implementation has its unique features and challenges.
We agree with the recommendation encouraging us to continue to bring those lessons to bear as appropriate as we continue the design and implementation work, although we would argue that we have already been doing this. We are already in discussions with industry on developing a ‘fit for purpose’ accreditation model for Single Touch Payroll enabled software.
In terms of reducing employers’ reporting requirements, this is already a key part of the design of Single Touch Payroll.
In relation to ensuring appropriate exemptions and low or no cost software for small employers, we note that small businesses currently have no obligation to report under Single Touch Payroll. Part of the current pilot for exploring the potential benefits of small businesses using STP is to also explore what mechanisms could best support their usage. In light of this work and the further consideration required to be given by government about STP and small businesses, we think it is premature to agree to these aspects of your recommendations.
3.48 Stakeholders have raised concerns that the SBSCH does not significantly reduce an employer’s compliance cost as it does not integrate with commercial software and requires employers to separately input data outside of their natural business systems.
3.49 Other concerns were raised in relation to commercial agreements between employers and their superannuation fund or clearing house. These agreements may require more frequent SG reporting and payment than what is mandated by legislation. They may also require provision of additional data when non-SuperStream methods are used. These concerns relate to business-to-business commercial agreements and are beyond the scope of this review as they do not relate to administrative aspects of the law or actions of the ATO.
Relevant ATO materials
3.50 The ATO has advised that the SBSCH is a:
…basic no-frills service that does not offer many of the features associated with commercial providers. Feedback from employer associations with commercial providers and the superannuation industry supports the position of the SBSCH as providing an important ‘safety net’ role. Specifically, it assists new-to-business employers and supports employers with limited software or payroll processing capabilities.206
3.51 While the SBSCH is an online service, it does not have the capability to interface with payroll or other software nor does it have the capability to accept files generated by such software.207
3.52 The administration of the SBSCH was transferred to the ATO as part of the 2013-14 Federal Budget and the SBSCH infrastructure is currently owned by the DHS.208 In February 2016, the ATO and the DHS agreed in principle to move the SBSCH infrastructure to the ATO.209 Preliminary briefings on the concept indicate a timeframe for commencement of transfer in August 2016 and completion by March 2018.210
3.53 The ATO has advised that transferring the SBSCH to the ATO will provide opportunities to make changes to the service such as extending its use and access through different channels (such as via mobile apps), over the counter services, and pre-filling ATO-held data into the SBSCH.211 However, any commitment to implement such improvement depends upon the successful transfer of the SBSCH into the ATO’s systems environment as well as the anticipated costs, benefits and impacts including the impact on relevant commercial software providers.
3.54 The ATO has confirmed that employers who use the SBSCH are required to manually input details of the employee at the registration stage and update the relevant fields at every payment period for the different components (that is, SG, additional employer contributions, salary sacrifice, and voluntary employee contributions) and where there are changes in employee details.212
3.55 Statistics provided by the ATO regarding the user profiles of employers who use the SBSCH213 show that:
- at the end of April 2016, there were 176,617 employers registered with the SBSCH with over 1.4 million employees; 214
- as at February 2016, the proportion of active users was 76 per cent;215 and
- 62 per cent of active employers had payroll software known to the ATO.216
3.56 One of the ways to reduce the administrative cost for employers is to minimise the need to manually transfer data from one system to another. Electronic payroll software assists employers in this regard. For example, employers can use commercially available software to comply with the SuperStream requirement without the need to manually transfer data.
3.57 The current design of the SBSCH requires manual data input into the SBSCH portal. The costs in using the SBSCH is likely to be of greater concern to those employers with a larger number of employees as they would need to perform SG calculations for each employee, either in their electronic payroll systems or on paper, before transposing the amounts into the SBSCH interface.
3.58 In preparation for the transfer of the SBSCH infrastructure from DHS, the IGT believes that the ATO should consider ways in which the SBSCH can be improved to reduce the compliance burden on employers. The IGT recognises any changes that the ATO may identify at this stage would have to be finalised and implemented after the infrastructure has been transferred.
3.59 One improvement, perhaps the simplest, that the ATO could consider is developing an interface which would allow employers to upload pro forma electronic files, such as Microsoft Excel or Apple Numbers, into the SBSCH. Such an upgrade could potentially assist 51,007 small employers217 who do not currently use payroll software. It is unclear how many of this group use Microsoft Excel or Apple Numbers as opposed to paper record keeping systems. However, it is likely that a significant number of them do and in any event, purchasing such applications would be more cost effective and easier to use than purchasing an entire payroll system.
3.60 A further step to reduce compliance cost for another group of employers is to upgrade the SBSCH such that it can accept standardised file extracts from commercial payroll software. This could assist a further 83,211 employers218 who use payroll software as well as the SBSCH. The reasons for use of both systems are not entirely clear. There may be many explanations, such as that their payroll software is not SuperStream compliant or they may have bespoke systems and an integrated system upgrade is anticipated in the future. They may also use the SBSCH where commercial clearing houses require advance payment for monies to clear and data to be checked prior to sending it to the relevant superannuation funds.219
3.61 The IGT notes that allowing the SBSCH to accept electronic files or standardised files from payroll software may, on one view, be considered as potentially competing with those commercial clearing houses and may go beyond its initial aim of providing a safety net for employers. However, the IGT is of the view that providing an interface to SBSCH of the kind outlined above would provide significant benefits by reducing the need for over 134,000 employers to make manual entries quarterly for every employee. It could also encourage the proportion of 51,007 employers who are not currently using electronic files for managing SG to adopt a basic electronic record keeping system — thereby further improving voluntary compliance.
The IGT recommends that the ATO consider developing a capability for the Small Business Superannuation Clearing House to receive:
- electronic files, such as Microsoft Excel and Apple Numbers; and
- standardised files from commercial payroll software.
Agree with recommendation 3.2.
The Small Business Superannuation Clearing House (SBSCH) is currently run on IT systems maintained by the DHS. It is proposed that the SBSCH be redeveloped into ATO operated IT systems, although details of that redevelopment are yet to be settled. When the redevelopment occurs (perhaps in 2018-19) we will consider potential improvements.
3.62 A range of stakeholders have raised concerns regarding the cost of complying with FBT requirements, particularly when compared to the amount of FBT revenue raised. Stakeholders have also observed that such costs are disproportionately high for small employers. Particular stakeholder concerns about the cost and difficulty associated with complying with FBT requirements include:
- administrative difficulties for employers around reporting non-cash benefits provided by third parties, salary packaging and record keeping requirements such as logbooks for cars;
- valuation and apportionment methodologies impose unnecessarily high compliance costs on small employers; and
- current software does not automatically calculate expense payment benefits at the employee level for the purposes of disclosing reportable fringe benefits on PAYG payment summaries.
3.63 Some stakeholders have observed that since the ATO’s National Tax Liaison Group FBT subcommittee was disbanded, employers and practitioners no longer have a forum to informally seek the ATO’s views on FBT matters. Whilst this issue is out of scope of the current review, the IGT has noted broader concerns with the ATO’s public consultation arrangements and has flagged it as an area of potential review in the future.220
Relevant ATO materials
3.64 The ATO’s annual reports provide data on the net cash collections for the FBT and total income tax for the five financial years from 2010-11 to 2014-15. This information is reproduced in Table 3.1 below.
|Fringe benefits tax||3,303||3,731||3,922||4,077||4,347|
|Total income tax||199,657||227,737||236,623||242,585||256,896|
|Proportion of FBT collections to total income tax collections||1.65%||1.64%||1.66%||1.68%||1.69%|
3.65 Table 3.1 shows that net cash collections for the FBT has increased over the last five financial years, from approximately $3.3 billion in 2010-11 to $4.35 billion in 2014-15.221 This represents an increase in FBT collections of approximately 32 per cent over five years. However, FBT collections as a proportion of total income tax collections remain relatively steady at approximately 1.66 per cent over the same period.
3.66 The ATO’s Taxation Statistics 2013-14 provides an indication of the time taken to complete the FBT returns. It is based on the employers’ estimate of time taken to complete the return. However, it is up to employers as to whether they provide such an estimate.222 This data indicates that it takes on average, approximately 12 hours to complete an FBT return.223 Similar data was not available for other years.
3.67 The ATO has advised that stakeholder submissions to this review regarding the compliance burden of FBT are consistent with other feedback it has received in previous Government reviews.224 In this respect, the ATO management view is that legislative change would be required to address most of the concerns.225 However, it has advised that it has been exploring what can be achieved administratively through its FBT and Remuneration Safe Harbour Working Group (SHWG) to reduce compliance costs.226
3.68 The ATO has also advised that it is considering two areas identified by the SHWG which may benefit from additional guidance, 227 being practical examples on:
- the level of infrequent/minor use that is acceptable for ‘exempt’ vehicles; and
- the application of the minor benefit rule for the provision of food and drink as well as recreational entertainment.228
3.69 In addition to the above, the ATO has released a Practical Compliance Guideline which is intended to provide employers with a fleet of vehicles a simplified method of determining the taxable value of car fringe benefits.229
3.70 In the UK, remuneration received by the employee as ‘benefits in kind’ is treated as taxable earnings and only amounts drawn in cash from the benefits plan are subject to withholding.230
3.72 New Zealand’s treatment of FBT, like Australia, levies the tax on employers. However the rate of FBT is chosen by the employer based on the ease of calculation, compliance costs, tax savings and whether the benefits are attributed to particular employees.233
3.73 As a general principle, simplicity of ascertaining liabilities and compliance with obligations is a key to good tax design. It also promotes voluntary compliance. Uncertainty and high compliance costs seem to have the opposite effect.
3.74 As noted in Chapter 1, the FBT was an integrity measure introduced to address tax avoidance and evasion practices by non-reporting of non-cash benefits to employees. As fringe benefits are generally not expected to comprise the bulk of an employee’s remuneration package, the proportion of taxes collected through the FBT would not be expected to be significantly high. This is reflected in the figures contained in Table 3.1 that the FBT accounts for approximately 1.66 per cent of all income tax collected.
3.75 Notwithstanding the relatively smaller amount of FBT collections, the compliance costs for large employers are relatively high. For example, a recent cost of compliance survey conducted by the Corporate Tax Association found that compliance with the FBT requirements represents the fourth largest component of large employers’ tax compliance costs after income tax, GST and transfer pricing. The average cost for these employers was approximately $233,000 per annum.234 Furthermore, the Treasury Stocktake of Regulation report, discussed earlier in this chapter, suggests that costs with respect to the FBT were underestimated and may largely be reflected in costs attributable to external fees which totalled $14 billion in 2011. The report also noted that FBT affects a small population which makes aggregate figures less useful in indicating the compliance burden for affected employers.
3.76 The available ATO data suggests that the average time for employers to complete an FBT return was 12 hours, while for income returns it was 5.5 hours.235 It should be noted that these average times do not include time spent on record keeping or ascertaining whether a liability arises at all. It is likely that the costs associated with these latter activities are proportionately higher for FBT.
3.77 To address the complexity of the FBT regime and resulting compliance costs, there are a number of potential options which have different consequences.
3.78 Some of the complexity of the FBT regime may be due to the fact that the provider of the benefit is being taxed rather than the receiver. One option would be to tax fringe benefits as part of salary and wages, that is, tax would be payable by employees but withheld at source by employers. This would be consistent with the approach in the UK236, the US237 and Canada238 where employees are liable for tax on fringe benefits and not employers. However, this option was considered at the time of introduction of the FBT regime but was not favoured by all stakeholders.239 It also involves a major overhaul of the current system and may not be achievable in the short term.
3.79 Another option would be to maintain the current FBT regime but reduce some of the complexity and costs of complying with it. For example, currently the FBT regime requires employers to consider the 12 different categories of benefits, each with its own calculations, exemptions, and valuations. Consideration could be given to replacing these multiple categories with a single, ‘whole-of-benefit’ test. Wide-ranging consultation processes would be required to ensure that complexity is reduced and ease of compliance is achieved without affecting the tax base. Whilst this option is not as far-reaching as the first, it is still a significant reform requiring some time to make the best policy decisions and subsequently implementing it.
3.80 A more achievable option in the short term, which may be carried out whilst progressing the second option, would be to reduce the compliance cost by limiting the application of FBT to certain employer groups or to certain fringe benefits. For instance, small businesses with a turnover below a certain low threshold could be exempt from FBT or FBT may be limited to the most common benefits such as car and entertainment. While such exemptions or limitations may ease the compliance burden, carving out particular groups or benefits may result in unintended behaviour. For example, limiting FBT to commonly provided benefits may result in an increase in the provision of those benefits to which FBT would no longer apply. Therefore, there is a risk of undermining FBT as an integrity measure.
3.81 Other more targeted options to limit the application of FBT include the BoT’s recommendations to increase the minor benefits exemption from $300 to at least $500.240 Stakeholders, as well as the IGT, support this recommendation as it is a practical way of reducing some compliance costs, for example no calculations would be needed with respect to these benefits. However, it is acknowledged that some compliance costs remain in interpreting terms such as ‘minor, infrequent and irregular’.
3.82 It should be noted that the above $300 threshold has not been increased since 2007241 and the suggested increase is timely. Further to the BoT’s recommendation, the IGT is of the view that this threshold should be annually indexed to ensure that it keeps pace with economic conditions.
3.83 The BoT also recommended investigation of the possibility of aligning the FBT year to the income tax year.242 The IGT notes that the current FBT reporting date allows time for employees to provide information to their employers to determine the reportable FBT amounts for PAYG payment summaries. If the FBT year was aligned with the income tax year, it would substantially reduce this period down to 14 days which may be insufficient for employers to process the relevant information. The employers’ other workload during this time of the year should also be considered. Therefore, further consultation may be necessary to determine the best outcome.
3.84 In considering the above reform options, it should be noted that any reconsideration of the FBT regime needs to examine whether the employer or the employee should be liable for the tax on fringe benefits and which of them should bear the compliance costs. Its role as an integrity measure needs to also be considered. Whilst it may not raise a significant amount of tax compared to the cost of complying with it, its deterrent factor cannot be ignored. A broad review243 of the FBT regime is required with options to deliver improvement in the short to medium term. It is recognised that some short-term measures may be administratively achievable without legislative change being necessary. These options are explored in the next chapter.
The IGT recommends that the Government considers reviewing the Fringe Benefits Tax regime with a view to delivering a reduction in compliance costs in the short to medium term as well as longer term fundamental reform.
Matter for Government.
3.85 Stakeholders have acknowledged the value of the TPRS as an effective tool for promoting voluntary compliance and support its expansion to cover other industries beyond just building and construction. However, the cost of compliance was also raised as a concern. Businesses either have to manually complete TPARs or, to lodge them electronically, they have to acquire the necessary software which may be costly and have compatibility issues with their current systems.
Relevant ATO materials
3.86 The ATO website describes the methods by which employers may lodge their TPAR. These include electronic methods via the ATO Business Portal or Standard Business Reporting (SBR) enabled software as well as by paper lodgement.244
3.87 For employers who wish to lodge their TPAR through SBR enabled software, there are currently 11 SBR enabled software products with TPAR functionality listed on the SBR website.245
3.88 The ATO has advised that of the 91,437 TPARs lodged during the 2014-15 financial year:
- 64 per cent (59,136 lodgements) were lodged via paper — representing businesses with an average of nine contractors;
- 29 per cent (26,779 lodgements) were lodged electronically via the ATO portals and SBR enabled software — representing businesses with an average of 34 contractors; and
- 6 per cent (5,522 lodgements) were processed manually by the ATO as they were received in the incorrect format — representing businesses with an average of five contractors.246
3.89 The ATO has also advised that the paper TPAR form only allows reporting for a maximum of nine contractors and businesses. Accordingly, those who have more than nine contractors and wish to lodge in paper form, have to lodge multiple TPARs.
3.90 As mentioned in Chapter 1, the TPRS was introduced to promote voluntary compliance and to create a level playing field amongst contractors in the building and construction industry.247 TPRS data plays a broader role in the economy and regulatory regimes as it is shared with the FWO and state and territory revenue offices (SRO) as well as being used to identify certain risks, such as phoenix activities.
3.91 The IGT is of the view that there is merit in expanding TPRS to apply to the engagement of all contractors, to foster voluntary compliance with taxation and
non-taxation obligations across all industries. Such an initiative would be supported by taxpayers provided any associated compliance costs are kept to a minimum. As noted above, there are already some concerns in this regard.
3.92 Attempts have already been made to reduce the compliance cost associated with the current TPRS by 11 software products being available to facilitate their electronic lodgement. This compares well with 27 software products being available for the electronic lodgement of PAYG payment summary which impacts all employers. However, there are still a high percentage of paper lodgements. A reason for this may be that, the cost associated with acquiring the required software, relative to the number payments made to contractors, is too high. This is supported by ATO statistics that indicated businesses with a greater number of contractors tend to lodge their TPAR via electronic means. Another reason may be compatibility issues with businesses’ existing systems.
3.93 The above compliance challenges may be overcome if the relevant information could be automatically provided to the ATO, without the need to lodge TPARs, similar to the automation that is to occur in STP. Such reduction in compliance costs would also facilitate the expansion of TPRS to all engagement of contractors in all industries.
3.94 The key principles of change management in implementing STP, discussed earlier, would also apply to the automation of reporting for TPRS. Similar analysis as in the initial development of STP will be required to determine whether inclusion of TPAR in automated reporting will reduce compliance costs for businesses who are already lodging electronically through SBR enabled software. A number of other issues also need to be considered such as whether a low or no cost solution is required for businesses that are not currently utilising electronic reporting systems.
3.95 There are some key differences between STP implementation and automation of reporting for TPRS. These arise from the fact that STP relates to payment of salary and wages whilst TPRS concerns payment to contractors. Therefore, the relevant amounts for TPRS appear in ‘accounts payable’ and not in payroll systems and there is less reporting because contract payments are not made as frequently as payment of salary and wages.
3.96 In summary, the expansion of TPRS to all industries and the automation of the required reporting would further promote voluntary compliance whilst minimising overall compliance costs. However, it would be prudent to delay the consideration of such a measure until STP has been fully implemented as augmented by the recommendations of this report.
The IGT recommends that the Government considers expanding the Taxable Payment Reporting System (TPRS) to the engagement of contractors across all industries and automating the required reporting under TPRS.
160 For example: Lignier, Philip and Evans, Chris, ‘The Rise and Rise of Tax Compliance Costs for the Small Business Sector in Australia’ (2012) 27 Australian Tax Forum 615, cited in The Treasury, RIS, STP, above n 46, p 4.
161 The Treasury, Stocktake of Regulation: Final Report (2015) p 20.
162 Ibid p 26.
163 Ibid p 21.
164 The Treasury, RIS, STP, above n 46, p 4.
165 ATO, STP Blueprint, above n 45, p 7.
166 The Treasury, RIS, STP, above n 46, p 46.
167 ATO communication to the IGT, 5 April 2016.
172 ATO communication to the IGT, 24 March 2016.
173 ATO communication to the IGT, 24 June 2016.
174 ATO communication to the IGT, 5 August 2016.
175 TAA, sch 1 s 389-20.
176 TAA s 8K(2A), sch 1 s 389-25.
177 TAA, sch 1 s 389-25.
179 TAA sch 1 s 389-20.
180 ATO, Single Touch Payroll solution summary version 1.0 (internal ATO document, 10 June 2016) p 14.
181 ATO, Single Touch Payroll Solution Summary – payroll processing (internal ATO document, 28 September 2016) p 9; Single Touch Payroll Core – Scope and Delivery Plan (internal ATO document, 9 September 2016)
182 The Treasury, RIS, STP, above n 46, pp 3, 13, 29 .
183 Ibid p 21.
184 Ibid p 26.
185 Ibid p 23.
186 Ibid p 19.
187 Ibid pp 23-4.
188 Ibid pp 23-6.
189 Ibid p 46.
190 TAA 1953 sch 1 s 389-10.
192 ATO, Compliance in focus 2013-14 (July 2013) p 8; Commissioner of Taxation, Annual Report 2013-14 p iii-v.
193 The Treasury, Stocktake of Regulation, above n 161, p 21.
194 The Treasury, RIS, STP, above n 46, p 7.
195 The Treasury, RIS, STP, above n 46, p 46.
196 Budget Savings (Omnibus) Act 2016 sch 23, div 3, item 22.
198 ATO, STP solution summary, above n 180, p 14; ATO, STP Solution Summary – payroll processing, above n 181, p 9; ATO, STP Core – Scope and Delivery Plan, above n 181.
199 The Treasury, RIS, STP, above n 46, p 13; ATO, STP Blueprint, above n 45, p 10.
200 Kelly O’Dwyer, ‘Streamlining business reporting with a single touch payroll’ (Media release, 21 December 2015).
201 House of Representatives, Revised Explanatory Memorandum, Budget Savings (Omnibus) Bill 2016, p 283.
202 ATO Corporate Research Centre, Small Business Fix-It Squad Survey, above n 76, p 3.
203 The Treasury, RIS, STP, above n 46, p 46.
204 Todd McClay, Minister of Revenue (NZ), Making Tax Simpler – Better digital services: a government discussion document (March 2015) p 32.
205 Ibid p 25.
206 ATO, Concept Brief, SBSCH Transfer to the ATO (internal ATO document, 24 June 2016) p 8.
207 Ibid p 8.
208 The Commonwealth of Australia, ‘MYEFO 2013-14’, above n 68, p 192.
209 ATO, SBSCH Transfer to the ATO, above n 206, p 4.
210 Ibid p 6.
211 Ibid pp 8-9.
212 ATO communication to the IGT, 20 May 2016.
213 ATO communication to the IGT, 9 March 2016.
214 ATO communication to the IGT, 10 June 2016.
215 114,000 of the 150,000 registered users as at February 2016.
216 ATO communication to the IGT, 9 March 2016.
217 Estimated number of active employers with no payroll software – 176,617 registered users, of which 76 per cent are active and 38 per cent have no known payroll software (176,617 x 0.76 x 0.38).
218 Estimated number of active employers with known payroll software – 176,617 registered users, of which 76 per cent are active and 62 per cent have known payroll software (176,617 x 0.76 x 0.62).
219 Superannuation Guarantee (Administration) Regulations 1993 s 7AE and SGAA 1992 s 23B, s 79A.
221 Commissioner of Taxation, Annual Report 2014-15 p 36 table 2.6.
222 The ATO’s Taxation statistics 2013-14 suggests that 21 per cent of FBT forms had completed the voluntary ‘time taken’ field.
224 ATO communication to the IGT, 10 March 2016; see also BoT, Tax impediments facing small business, above n 73, p 53.
225 ATO communication to the IGT, 10 March 2016.
227 ATO, FBT and Remuneration Safe Harbour Working Group – safe harbour topic register (internal ATO document, 13 August 2015); ATO communication to the IGT, 15 April 2016.
228 ATO communication to the IGT, 10 March 2016.
229 ATO, Fleet Cars: simplified approach for calculating car fringe benefits, Practical Compliance Guide 2016/10 (2016).
234 Corporate Tax Association communication to the IGT, 24 March 2016.
239 Commonwealth, Cabinet Memorandum 2875 - Draft White Paper on reform of the Australian tax system, Decision 5629 (1985) paras [8.7]-[8.21]
240 BoT, Tax impediments facing small business, above n 73, pp 54-5.
241 Tax Laws Amendment (2006 Measure No. 5) Bill 2006.
242 BoT, Tax impediments facing small business, above n 73, pp 54-5.
243 It should be noted that the relevant issues were largely raised in the Government’s Tax White Paper. See The Treasury, Re:think Tax discussion paper (March 2015) p 56.
246 ATO communication to the IGT, 8 July 2016.