The Proposed Building and Construction Industry Reporting Arrangements  

Andy Briggs, Principal - Tax Consulting

The Government's consultation paper is blunt about why reporting of payments to contractors in the building and construction industry (BCI) needs reform:

...the ATO has identified a high level of non compliance by contractors in the BCI, particularly in relation to lodgment, correct reporting and payment. There are also associated problems with contractors not complying with GST requirements, record keeping requirements and the personal services income rules.

Consequently, contractors that receive payments from purchasers in the BCI need to be aware that these payments are likely to be subject to some scrutiny by the ATO in the future. In this article, we look at:

•·         The new reporting requirements

•·         The two immediate issues contractors and purchasers of contractors' services need to address 

•·         Portents for the future - a message in the tea leaves

The new reporting requirements

The Government is proposing that purchasers of contractor services in the BCI will be required to lodge a new "Division 405" report with the ATO each year. The report will have to detail:

• Names of suppliers (contractors and sub-contractors) used by the purchaser during the year
• All suppliers' ABNs
• Total "Div 405 payments" made during the year (a Div 405 payment is a payment for a supply under a contract that in whole or in part involves a supply of BCI services).

Given that the draft legislation has not yet been released but that the new reporting requirements are proposed to apply from 1 July 2012, purchasers of contractor services will need to have operational systems in place to record the relevant information ready to go at short notice.

Two immediate issues to address

The two major issues for purchasers, contractors and sub-contractors are whether particular supplies made after 1 July 2012 are within the new reporting requirements, and if there are any exclusions from the regime.

Is this supply subject to the new regime?

Generally, a supply requiring compulsory reporting will be one made to a "purchaser" that in whole or in part involves a supply of building and construction services. The Government has intentionally made this very broad. The consultation paper states that there are around 451,000 contractors and sub-contractors that will be affected by the proposed regime.

Exclusions

A critical issue for contractors and sub-contractors is being aware of when the new reporting regime will not apply. Where an exclusion applies, contractors and sub-contractors will not be required to give their details to the purchaser of the services provided.

Supplies that comprise only goods or materials will not be subject to the new reporting requirements, and nor will supplies of labour under common law employment contracts that are subject to PAYG withholding. Importantly, it appears that only supplies made to "purchasers" will be caught by the new measure - a  "purchaser" being defined as an entity whose core business is the provision or procurement of building and construction services.

One major exclusion relates to the household construction sector. Builders who operate on private and domestic construction sites (i.e. for people building their own homes) and employ contractors and sub-contractors will not be "purchasers" under the proposal. Equally, owner builders that use sub-contractors will not be required to report.

While knowledge of these exclusions will be helpful to some, the reporting requirements are likely to be effectively self-executing. This is because the obligations (and penalties) are not on the supplier, but on the purchaser. In effect, this will mean a "no ABN, no start" regime will apply to contractors and sub-contractors.

Portents for the future - a message in the tea leaves

Clearly, the ATO will be using the information provided through this reporting regime. Indeed, based on recent experience involving benchmarking, it is likely that the ATO will issue default income tax assessments based on information garnered from Division 405 reports. Recipients of such assessments would need to prove that the ATO assessment was incorrect. As a result, robust record keeping systems will need to be in place for contractors and sub-contractors from 1 July 2012.

The second observation is that this reporting regime is likely to become a template for reporting regimes in other industries. The Assistant Treasurer has already flagged a similar reporting regime for contractors in the commercial cleaning industry. Those with long memories will remember a similar regime, the Prescribed Payments System (PPS). This is increasingly looking like a reintroduction of the PPS by stealth - only now the ATO is armed with better technology and strengthened legislation such as the PSI regime. Contractors and sub-contractors beware!