Taxable payments reporting – building and construction industry

Businesses in the building and construction industry need to report the total payments they make to each contractor for building and construction services each year.

You need to report these payments to us on the Taxable payments annual report by 28 August each year.

To make it easier to complete the annual report, you may need to check the way you currently record your contractor payment information.

The information reported about payments made to building and construction contractors is used in our data matching program to detect contractors who have not either:

  • lodged tax returns
  • included all their income on tax returns that have been lodged.

Find out about:

See also:

Reporting

Work out if you need to report

You need to report to us if all of the following apply:

  • you’re a business that is primarily in the building and construction industry
  • you make payments to contractors for building and construction services
  • you have an Australian business number (ABN).

You’re considered to be a business that is primarily in the building and construction industry if any of the following apply:

  • in the current financial year, 50% or more of your business income is derived from providing building and construction services
  • in the current financial year, 50% or more of your business activity relates to building and construction services
  • in the financial year immediately before the current financial year, 50% or more of your business income was derived from providing building and construction services.

Details you need to report

For each contractor, you need to report the following details each financial year:

  • ABN – if known
  • name
  • address
  • gross amount you paid for the financial year – this is the total amount paid, inclusive of goods and services tax (GST)
  • total GST included in the gross amount you paid.

You are required to report the payments you make to contractors in the financial year in which the payments are actually made (cash basis).

The details you need to report is generally contained in the invoices you receive from your contractors.

See also:

Keeping records

It is important to check the way you keep your contractor payment information to make sure you have the details you need to complete the Taxable payments annual report.

See also:

Payments you need to report

You need to report payments you make to contractors for building and construction services.

The definition of building and construction services is broad – it includes any of the activities listed below if they are performed on, or in relation to, any part of a building, structure, works, surface or sub-surface:

  • alteration
  • assembly
  • construction
  • demolition
  • design
  • destruction
  • dismantling
  • erection
  • excavation
  • finishing
  • improvement
  • installation
  • maintenance
  • management of building and construction services
  • modification
  • organisation of building and construction services
  • removal
  • repair
  • site preparation.

See also:

  • Appendix 1 for a list of occupations and work activities that qualify as building and construction services
  • Appendix 2 for examples of what we consider to be buildings, structures, works, surfaces or sub-surfaces

Example 1: Business primarily in the building and construction industry

FS Builders earns all of its income from building commercial properties for its clients. FS Builders is primarily in the building and construction industry as 50% or more of its income is from providing building and construction services. It is required to report the total payments it makes to contractors for providing building and construction services.

End of example

 

Example 2: All business activity in building and construction

ABC, a property developer, has purchased a block of land in the Melbourne city precinct and intends to build apartments. ABC has created a separate entity, Upmarket Apartments Pty Ltd, to manage the project and construction of the apartments. Upmarket Apartments is required to report payments to contractors for providing building and construction services because 50% or more of its business activity relates to building and construction services.

End of example

 

Example 3: Not all income from building and construction

Scott’s Cabinet Makers Pty Ltd is a business that makes and installs custom-made kitchen cabinets, which is a type of activity that is a building and construction service. It also makes and sells ornamental wooden carvings.

The table below shows the income Scott’s Cabinet Makers earned from its different activities.

Financial year Income from cabinet making Income from carvings
Year ended 30 June 2013 45% 55%
Year ended 30 June 2014 60% 40%
Year ended 30 June 2015 40% 60%

Scott’s Cabinet Makers is required to report the payments made to contractors in the 2013–14 financial year because it earned 50% or more of its income from building and construction services in that year. Although it will not earn 50% or more of its income from building and construction services in the 2014–15 financial year, it also needs to report payments to contractors in that year because of its 2013–14 income.

End of example

 

Example 4a: Retail business providing minor building and construction services

Harry’s Hardware is a business that sells building equipment to builders and home owners. For an additional fee, Harry’s Hardware can arrange the installation of certain products, such as a skylight. It does not meet either the activity or income tests of being primarily in the building and construction industry. The store is not required to report payments to contractors who do the installation because it is primarily in the retail industry rather than building and construction.

Example 4b: Business with separate entity for building and construction services

Harry’s Hardware sets up a separate business entity, Harry’s Installation Services, to install the products it sells. Harry’s Hardware is not required to report on payments made to contractors because it is not carrying on a business that is primarily in the building and construction industry. However, because all of the income for Harry’s Installation Services is from the provision of building and construction services (installation of products) it is required to report payments it makes to contractors for such services.

End of example

 

Example 5: Mining infrastructure

Black Coal establishes a new mining facility that requires the construction of a range of infrastructure. Black Coal contracts Earl’s Earthworks to carry out the work. In turn, Earl’s Earthworks subcontracts the work. Black Coal is not required to report its payments to Earl’s Earthworks because all of its income is from coal mining. However, Earl’s Earthworks, which is carrying on a business primarily in the building and construction industry, is required to report payments it makes to subcontractors.

End of example

 

Example 6a: Certification

J & L Builders was contracted by a property developer to build a 15-storey building. J & L Builders engaged D & R Pty Ltd, to certify each stage of the building work. D & R Pty Ltd followed the project through to the end, carrying out the building inspections and issuing the occupancy permit. J & L Builders is required to report the total payments it made to D & R Pty Ltd for the inspections and certification.

Example 6b: Inspections and certifications

RS Electrical Pty Ltd is a business that performs work related to the design, installation and maintenance of electrical systems. The company engaged James to inspect the electrical work on a building project and provide electrical certification. The payments they made to James are reportable.

Example 6c: Testing and tagging

LA Plumbing Pty Ltd is a business primarily in the building and construction industry, and has engaged George to test the electrical equipment and tools they use in their business and to tag these. George’s business is to test electrical appliances to ensure they are safe. The payments LA Plumbing Pty Ltd makes to George for testing and tagging their electrical equipment and tools are not reportable because the activity is not a building and construction service.

End of example

 

Example 7: Equipment hire with or without an operator

An equipment hire store provides plant and machinery for hire to the building and construction industry – for example, bobcats, scaffolding and tippers (commonly known as ‘dry hire’). The store can also provide the equipment with an operator (commonly known as ‘wet hire’) for an additional fee. A builder who hires a bobcat with an operator (wet hire) needs to report the payment it makes to the equipment hire store because the builder is paying for a building and construction service, not just the equipment hire. Wet hire is a building and construction service.

End of example

 

Example 8: Contractor paying another contractor

Rob’s Installation Services (principal contractor) contracts Simon (first-tier subcontractor) to install products. However, Simon is not coping with the amount of work and subcontracts some of the work to Bill (second-tier subcontractor). Rob’s Installation Services needs to report on the payments it makes to Simon. If Simon is carrying on a business that is primarily in the building and construction industry, he is required to report the payments he makes to Bill.

End of example

Payments for both labour and materials

If invoices you receive include both labour and materials, whether itemised or combined, you report the whole amount of the payment, unless the labour component is only incidental.

Example 9: Incidental labour component

Kevin purchases a stock of new taps from Harry’s Hardware to install in a commercial building. Harry installs one tap by way of demonstration, so that Kevin knows how to install the rest. Harry’s Hardware invoices Kevin for the taps and includes a small amount for the labour to demonstrate the installation. Kevin does not need to report the payment he makes to Harry’s Hardware because the labour component of installing the tap is incidental to the supply of the materials.

End of example

 

Example 10: Not incidental

An electrical business provides labour and materials for various electrical applications. A builder pays the electrical business for the supply and installation of wiring in a commercial fit-out that he is managing. Because the provision of the installation service is a building and construction activity and more than incidental to the supply of materials, the builder will be required to report the total payment made to the electrical business. The builder is carrying on a business that is primarily in the building and construction industry.

End of example

When to report

Your Taxable payments annual report is due by 28 August each year. Penalties may apply for not lodging your annual report by the due date.

See also:

Lodging your Taxable payments annual report

You can lodge your Taxable payments annual report by one of the following methods:

 

  • online using the Business, Tax Agent and BAS Agent Portals or Standard Business Reporting (SBR)
  • completing the paper form Taxable payments annual report (NAT 74109) and mailing it to us.

You cannot lodge your report in formats such as photocopied forms, scanned images of forms, screen prints, spreadsheets, word processing files (for example .pdf, .doc, .xls, .jpg, .tif) or on electronic media (such as CD-ROM, DVD, USB, floppy or zip disk). These formats are not acceptable for this annual report.

Find out about:

Online

Lodging online is a quick and secure way to meet your reporting obligation. It has the advantage of ensuring you complete the report correctly (using inbuilt checks) and providing you with an online confirmation once your report is lodged.

To lodge online you will need:

  • an Australian business number (ABN)
  • an AUSkeyExternal Link – to protect your security and privacy when dealing with us online
  • accounting software that meets our requirements.

You can lodge your annual report online using:

  • our portals – Business, Tax Agent and BAS Agent portals To lodge the Taxable payments annual report via the portals you need to create an electronic annual report data file using accounting software. You then login to the portals using your AUSkey, and lodge the annual report via the file transfer function.
  • Standard Business Reporting (SBR)External Link – To lodge the Taxable payments annual report using SBR, you will need SBR-enabled accounting software. By using SBR, you are supplying the information directly from an approved accounting software program. The software program will provide validation and confirm receipt of the report.

Watch:

Duration 3:39. A transcript of How to lodge your taxable payments annual report online is also available.

Paper

If you want to lodge a paper form, you must complete and send the Taxable payments annual report to us. You can’t use copies of this form that you’ve printed or photocopied yourself – you must use forms that we’ve printed. You can obtain forms by noting the full title or NAT number and either:

The paper form allows you to report up to nine contractors. If you have more than nine contractors, you will need to order additional forms.

Avoid common mistakes

Here are some tips to help you save time and get your annual report lodged correctly.

  • Complete your details ensuring that you are providing the correct name and ABN of your business.
  • Fill in your contact details so if we have any questions, we can check these with you quickly and easily over the phone.
  • Check your contractors’ details (ABN, name, address) to confirm that they are correct. It is a good idea to check their ABN by using ABN LookupExternal Link
  • When you receive an invoice, check that the ABN on the invoice matches the ABN on your record for that contractor. Ensure that you create a new contractor record if necessary. Where a contractor’s ABN changed during the year, you will need to include the two payee records in your annual report.
  • Check that the right amounts are at the right labels. Do not include cents or strike out boxes or add zeros to boxes that are not used.
  • For example, if the total amount you paid a contractor during the year was $13,579.20, ignore the cents and show the amount as follows:
Show amounts in whole dollars
  • Only complete the Total tax withheld where ABN not quoted field if you have withheld an amount because a contractor did not provide you with their ABN. Do not include any other amounts in this field. If you did not withhold, leave this field blank.
  • For each contractor, include the total amount of GST you paid for the year in theTotal GST paid field. This will show how much GST they charged on their invoices. You can check if the contractor is registered for GST by using ABN LookupExternal Link on our website or via the ATO app.
  • Only report details of contractors who provided you with building and construction services.
  • Refer to the list of occupation and work activities that are considered to be building and construction services.
  • You cannot lodge the report in formats such as photocopied forms, scanned images of forms, screen prints, spreadsheets, word processing files (for example .pdf, .doc. .xls, .jpg, .tif) or on electronic media (such as CD-ROM, DVD, USB, floppy or zip disk). These formats are not acceptable for this annual report.

Payments you don’t report

Payments for materials only

You’re not required to report on payments if the invoices are for materials only, such as building supplies and materials.

Unpaid invoices as at 30 June each year

Don’t report any unpaid invoices as at 30 June each year – for example, if you receive an invoice in June 2014, but you do not pay that invoice until sometime in July 2014, you report that payment in the 2014–15 Taxable payments annual report.

Pay as you go withholding payments

You don’t report payments that are required to be reported in a PAYG withholding annual report – for example, payments to:

  • employees
  • workers engaged under a voluntary agreement to withhold
  • workers engaged under a labour-hire or on-hire arrangement
  • contractors who do not quote an ABN.

If amounts are withheld because a contractor didn’t quote an ABN, you can report the details in the Taxable payments annual report instead of the PAYG withholding where ABN not quoted annual report.

If an ABN isn’t provided, you must withhold under the existing pay as you go withholding arrangements.

See also:

Payments for private and domestic projects

You don’t need to report if you are a:

  • homeowner making payments to contractors for building and construction services – for example, if you are building or renovating your own home
  • business in the building and construction industry and you make payments to contractors for building and construction services for private purposes – for example, if you are building or renovating your own home. These payments cannot be claimed as tax deductions.

Example 11a: Homeowner paying for building and construction services

Kristyn, who has an ABN for the purposes of running a bookkeeping business, manages the construction of her new home and makes payments directly to the contractors. Kristyn won’t be required to report payments she makes to contractors because she is undertaking the activity in a domestic capacity, not as a business.

Example 11b: John is a builder and runs SF Builders as a sole trader. He is currently doing renovations on his own house and has engaged ML Carpets to handle the removal of old and installation of the new carpet. As this renovation is private and not part of John’s or SF Builders’ business, the payments he makes to ML Carpets is not reportable. John or SF Builders is not able to claim tax deductions for these payments.

End of example

If the work is in relation to carrying on a business, then the amounts paid to the contractors in relation to this work are required to be reported. The payments that are reportable are those made as part of the business and for which the business can claim a tax deduction (i.e. payments to contractors).

Example 11c: Business paying for building and construction services

Bob and Stuart are partners in BH & SM Properties. Bob also owns and runs BH Fencing as a sole trader. BH & SM is building several investment properties and has engaged BH Fencing to install fences around the properties. Since this is a business to business transaction, the payments that BH & SM Properties make to BH Fencing for installation services, is reportable.

End of example

Payments within consolidated groups

If you’re in a consolidated group or multiple entry consolidated group for income tax purposes, you don’t need to report payments you make to another member of that same consolidated or multiple entry consolidated group. This is because members of a consolidated group or multiple entry consolidated group are effectively taxed as a single entity.

Example 12: Payments within consolidated groups

Brick Co and Paint Co are both members of the same consolidated group for income tax purposes. Brick Co provides building services and makes a payment to Paint Co for painting its building project. Because Paint Co and Brick Co are in the same consolidated group, Brick Co won’t have to report on the payment made to Paint Co for the provision of painting services. However, it will have to report on payments made to entities outside the consolidated group for the supply of building and construction services.

End of example

Not required to lodge a Taxable payments annual report

If you are no longer in the building and construction industry or did not pay contractors, tell us that you are not required to lodge an annual report to avoid unnecessary follow up. You can do this by completing the Taxable payments annual report – Not required to report (TPAR Nil Report) online form.

If your business is no longer in the building and construction industry, check that you include the correct industry code on your next tax return and you update your details on the Australian Business Register. You can use our Business industry code tool to check the industry code. Reporting the correct code ensures you are not incorrectly identified for compliance activity and your business receives information relevant to your business activity.

See also:

Correcting a lodged annual report

You may need to correct the information you reported to us for a variety of reasons – because you made a mistake in the amounts reported or the ABN or business name of the payee were incorrectly reported.

This table shows how to request a change or correct a previously lodged annual report.
What do you need to correct How to correct information reported
Amounts reported Report lodged online 

  • An amendment function may have been built into your software. This would allow you to correct your records and generate a new file containing only the amended records. You can check your software instructions or confirm with your software developer if amendment functionality is available in your software.
  • If an amendment function is not available in your software, you will need to lodge your amendment by paper.

Report lodged by paper

  • Prepare and lodge an amended report
    • Only include the payees where the amounts reported need to be corrected
    • Complete all the fields for these payees and show the amounts as they should have been reported
  • Mark the ‘amending an annual report’ field with an ‘X’, and send the amended annual report to the address on the front of the form
When amending an annual report tick the box
  • Send the amended annual form to:
    Australian Taxation Office
    PO Box 3128
    PENRITH NSW 2740

 

Other information:

  • Payee’s:
    • ABN
    • Business or individual name
  • Payer’s:
    • ABN
    • Business or individual name

 

  • Write to us with the following information:
    • your ABN
    • your business’s name
    • your contact details (address, email address and phone number)
    • the annual report you want to be corrected (eg 2014 Taxable payments annual report)
    • the payee and/or payer details that were reported and need to be corrected
    • the payee and/or payer details as they should have been reported
    • the reason for the change or explanation of how you made the mistake

 

Payee’s phone number, or

Payee’s address

If these are the only information that need to be corrected, you don’t need to advise us.
Where to send your request

Your request to correct mistakes can be sent to us by post to:

Australian Taxation Office
PO Box 9977
MOONEE PONDS  VIC  3039

Contractors in the building and construction industry

Businesses in the building and construction industry have to report to us the total amount they’ve paid you each year for building and construction services. This information allows us to identify those contractors who haven’t included all their income on their tax return, or not lodged tax returns.

Note: If you are meeting your tax obligations, you don’t need to do anything.

If you are not meeting your tax obligations, and you choose to do nothing, you could be subject to a review or audit and may face penalties.

See also:

How to check you are meeting your obligations

  • Lodge your tax return by the due date
  • Include all your income in your tax return
  • Lodge any tax returns for previous financial years as soon as possible
  • Consider making a voluntary disclosure if you think you’ve made a mistake on a previously lodged tax return. If you voluntarily advise us of any errors or omissions, any penalties that apply may be reduced
  • Keep records of all the income you receive and payments you make in relation to providing building and construction services. Keeping records of your business transactions helps you in reporting all the income you receive, and claiming all the deductions you are entitled to
  • Check that you’ve met your other tax obligations.

See also:

If you need help

Contact us if you have a tax debt and you can’t pay your tax debt on time.

See also:

If you pay other contractors

If you pay other contractors for building and construction services, you may also be required to report these payments to us each year. A contractor can be a sole trader (individual), partnership, company or trust.

See also:

Webinars (online seminars)

A 60-minute webinar session will outline the requirements of taxable payments reporting. All you will need is a computer with internet access to register and join in a session.

Next step:

Frequently asked questions and answers

1. Why is there a taxable payments reporting system?

The reporting system helps to address longstanding tax compliance issues by contractors in the building and construction industry including:

  • non-lodgment of tax returns
  • income being omitted from tax returns that are lodged
  • non-compliance with GST obligations
  • failure to quote an Australian business number (ABN)
  • use of an invalid ABN.

2. Why are businesses required to report annually rather than quarterly?

We’ve varied the reporting requirements from quarterly to annual reporting to minimise compliance costs for businesses.

3. Why am I required to report on a cash basis?

This resulted from feedback provided in the consultation process. Many businesses in the building and construction industry are micro businesses, and a significant proportion of these businesses account on a cash basis. We’ve varied the reporting requirements to only require businesses to report the payments they make to contractors in the financial year in which the payments are actually made (cash basis).

4. What does the ATO do with the information reported?

The information that is reported is used for

  • pre-filling purposes to make it easier for individual contractors to lodge their income tax returns,
  • data-matching purposes to ensure contractors comply with their tax obligations including lodging their tax returns, reporting all their income in lodged tax returns, complying with their GST obligations, and quoting their correct ABN. Find out about our current data matching activities

5. Do I also need to report payments I make to suppliers?

Suppliers who provide building and construction services are also contractors for the purpose of the taxable payments reporting system. You need to report the total payments you make to suppliers for building and construction services.

6. Do I report payments to contractors who repair and service my tools and equipment?

No. Maintenance of equipment and tools is not a building and construction service.

7. I only purchase properties for rental purposes, and engage a property manager to manage them. Do I need to report the payments I make to the property manager?

No. You are not required to report because you’re not considered to be carrying on a business that is primarily in the building and construction industry.

8. A property manager pays a plumber to fix a burst water pipe or undertakes maintenance work on a property. Do the payments the property manager makes to the plumber have to be reported?

Because the property manager’s business activity is managing investments, they aren’t considered to be a business that is primarily in the building and construction industry. As a result, the property manager doesn’t need to report the payments made to the plumber.

However, if the property manager creates a separate entity to manage the building maintenance of the property, this entity will need to report the payments to the plumber – this is because the separate entity is considered to be primarily in the building and construction industry.

9. I’m a land owner and I engage a project manager to manage the development of a building on my land. Do I need to report the payments I make to the project manager?

No. Your core business activity is to purchase and sell property. You’re not carrying on a business primarily in the building and construction industry and are not required to report payments made to the project manager.

10. I’m a land owner and have a project manager that engages contractors to do excavation and foundation works on my land – do I report the payment made to these contractors?

The project manager is required to report the payments made to contractors for building and construction services, because it would be considered to be carrying on a business that is primarily in the building and construction industry. Project management is a building and construction service.

11. If I engage a contractor, and reimburse expenses they incurred in the course of providing building and construction services, do I need to include the reimbursed amounts in my annual report?

Yes. If you are a business primarily in the building and construction industry, the reimbursed amount is required to be included in your annual report.

12. When is a payment for labour considered to be incidental?

If the labour component is immaterial to the actual supply of the material, then it is incidental.

If a concrete truck is used to deliver concrete, and the driver merely directs the pouring of the concrete into the trenches, the driver’s labour component is incidental, or minor, to the supply of the concrete. The builder is paying for concrete and does not need to report the amount paid.

If, for some reason, the driver pours the concrete, levels and does the formwork, then this is more than incidental. The builder is paying for the concrete as well as a building and construction service, and the total amount paid is reported.

13. I’m in the building and construction industry. Sometimes I pay one of my contractors for invoices for both materials and labour. Other times, I pay for materials only. Do I report all of the payments I make to this contractor?

You’re not required to report payments made for materials only.

However, if you’re unable to easily separate payments made for materials only without significant administrative effort, you can report all the payments you make to this contractor.

14. Are government or non-profit organisations required to report payments they make to contractors for building and construction services?

Yes. If a government or non-profit organisation is carrying on a business that is primarily in the building and construction industry and they pay contractors for building and construction services, they’re required to report the total payments they make to each contractor for building and construction services.

15. I’m a member of a consolidated group for income tax purposes. I’m the only member in the group conducting a business that is primarily in the building and construction industry. Do I need to report if the consolidated group is not considered to be conducting a business that is primarily in the building and construction industry?

You’re required to report payments for building and construction services you make to contractors outside of the consolidated group. The consolidated group provisions don’t apply to the taxable payments reporting system. Each entity of the consolidated group is required to consider whether they are conducting a business that is primarily in the building and construction industry.

You’re not required to report payments for building and construction services made to another member within the same consolidated group.

16. I’m a labour-hire firm. Do I need to report the payments I make to my workers who are hired under a labour-hire arrangement to provide building and construction services?

No. You’re not required to report payments if you are required to withhold amounts under the pay as you go (PAYG) withholding provisions for labour-hire or on-hire arrangements.

See also:

17. I’m in the building and construction industry. Am I required to report payments I make to contractors who are foreign residents?

Payments to foreign residents for building and construction services performed in Australia are generally subject to pay as you go (PAYG) foreign resident withholding. If the payments are not subject to PAYG withholding then they are required to be reported in the Taxable payments annual report.

Payments to foreign residents for work performed overseas are not reported in a Taxable payments annual report.

See also:

18. Do I have to provide my contractors with the details of the amounts I report in relation to payments made to them?

No. There is no requirement to provide your contractors with any details of the information reported, but you can choose to provide your contractors with details of the information you provided using the Payee information statement.

Forms and tools

Taxable payments annual report

If you want to lodge a paper form, you must complete and send the Taxable payments annual report (NAT 74109) to us. You can’t use copies of this form that you’ve printed or photocopied yourself – you must use forms that we’ve printed.

You can obtain an annual report form by noting the full title or NAT number and either:

The paper form allows you to report up to nine contractors. If you have more than nine contractors, you will need to order additional forms.

A ‘sample only’ copy of the Taxable payments annual report is available. This is a sample form only – you can’t use this to prepare your annual report.

Worksheet

You can print our worksheet to help you record details of payments you make to contractors for their building and construction services, particularly if you keep manual records. You can use the details you record in the worksheet to help you complete your Taxable payments annual report. The worksheet is for your records only – do not send this to us.

For a copy of the worksheet, refer to Taxable payments reporting – worksheetThis link will download a file(PDF, 129 KB)This link will download a file.

Payee information statement

There is no requirement to provide your contractors with any details of the information you have reported to us in a Taxable payments annual report. However, if you want to give your contractors information that will help them complete their tax return, you can use the Payee information statement which we have developed for this purpose.

The amounts reported on this statement are the total amounts that you have reported to us. The amounts are in whole dollars and don’t include cents. The statement is for your records and your contractors’ records only – don’t send this to us.

Next step:

The form is a fillable PDF that can be completed on your computer screen, saved and printed. If you prefer to complete the form on your computer, click on each field to complete. If you prefer to complete the form by hand, print a blank copy and complete the form.

If you need to issue a new statement to correct one that was previously given to a payee, write ‘Amendment’ across the top of the new form.

Taxable payments reporting – effectiveness measurement

Analysis of the impacts of the taxable payments reporting system in improving compliance in the building and construction industry. The information in the report is current at December 2014.

Executive summary

The taxable payments reporting system introduced in the 2012–13 tax year, requires businesses in the building and construction industry to report to the ATO payments they make to contractors within the industry. The ATO has analysed the reported information and reviewed the compliance behaviour of contractors whose incomes were reported under the system. This report details a number of observations that demonstrate improvements in voluntary compliance in response to the system.

Additional income tax and GST liabilities of $2.3 billion for 2012–13 have been voluntarily reported to the ATO by businesses whose incomes were reported under the taxable payments reporting system. This amount is comprised of:

  • lodgment of tax returns $265 million
  • goods and services tax $506 million
  • pay as you go withholding $1,128 million
  • pay as you go instalments $357 million.

The figure of $2.3 billion reflects an increase in liabilities reported by businesses in the building and construction industry that:

  • received taxable payments that were reported, and/or
  • reported taxable payments to the Tax Office.

Specific increases cannot be attributed solely to the impact of the taxable payments reporting system. However, it is likely that the majority of the increase flows from the introduction of the reporting system, the communications and education program together with acceptance of the system by reporting businesses.

We have also identified a number of apparent compliance risks where additional liabilities could be secured through direct compliance activity:

Tax return lodgment – 76,000 contractors with reported payments still have not lodged a 2012–13 tax return and 21,000 have one or more 2012–13 activity statements unlodged.

Omitted income – 53,000 contractors have lodged 2012–13 tax returns but appear to have reported less income in their tax returns than they have been reported to have received.

GST compliance – 84,000 contractors, without an active GST registration have been reported to have received payments that include GST totalling $426 million.

Invalid or missing ABN – 53,000 transactions (3.4%) did not include an ABN or the quoted ABN was invalid. The value of these transactions is $1.3 billion and this amount is unlikely to have been included in contractor tax returns.

Further analysis of this information is needed to identify amounts that may relate to incorrect reporting but where the underlying tax has been accounted for.

Building and construction industry businesses with reporting obligations have responded well to the system, approximately 76% of businesses that need to lodge have done so. They have reported 1.58 million transactions valued at $163 billion. The availability to the ATO of this valuable information has driven significant improvements in compliance by contractors. This has had a positive impact on levelling the playing field across the building and construction industry, reducing unfair competition from businesses that do not pay their fair share of tax.

To assist with compliance, the ATO has made information on 97,700 reported payments available through our pre-filling service for individual contractors and their tax agents to review when completing their 2012–13 returns, making it easier for these contractors to correctly report their incomes.

Background

The taxable payments reporting system was introduced in the building and construction industry for payments made from 1 July 2012. Businesses in the industry are required to report payments they make to other businesses (including contractors) for building and construction services.

The taxable payments reporting system is aimed at:

  • assisting contractors to meet their income tax obligations
  • improving compliance with tax obligations by contractors in the building and construction industry, and
  • creating a level playing field for businesses and improving tax fairness within the industry, by ensuring compliant businesses are not disadvantaged by those who can undercut prices because they do not pay the correct amount of tax.

Specifically, the system addresses the following compliance problems identified as prevalent in this industry:

  • non-lodgment of tax returns
  • omitted contractor income
  • not complying with GST obligations.

Taxable payments annual reports for 2012–13 were due for lodgment on 21 July 2013 with an extension granted for businesses using an agent to prepare their report until August. As of 31 December 2014, approximately 102,000 annual report lodgments have been received for 2012–13. This report focuses on analysis of the information contained in the 102,000 taxable payments annual reports and the taxpayers whose income is reported in them.

Timeline - Taxable Payments Reporting: 1 July 2012 payment made to contractor, 1 July 2013 Payment reported to ATO, 1 July 2014 Tax return lodgments commence.

Improvements in compliance by contractors

The system was designed to improve compliance by contractors specifically in relation to:

  • lodgment of tax returns
  • correctly reporting business income
  • GST obligations.

The following analysis looks at the income tax and GST compliance of contractors in the taxable payments industries that have been identified as having received a payment reported in a taxable payments annual report.

Contractor lodgment compliance

We have compared 2011–12 and 2012–13 income tax returns and business activity statements lodged by businesses in the taxable payments industries that have had their incomes reported under the taxable payments reporting system. There has been an improvement in both activity statement and income tax return lodgment.

We have contacted 249,000 contractors where taxable payments reporting information has shown they have received income and they have outstanding lodgments. This work is continuing and so far $265 million in liabilities has been raised from lodgments received.

Income tax return lodgment

Overall levels of compliance with income tax return lodgment have increased. While 76.9% of contractors have lodged their 2011–12 tax return, this has improved to 80.0% of 2012–13 tax returns.

There has also been a marked improvement in the category of ‘unknown’ lodgment status. Unknown lodgment status relates to where an obligation to lodge is not recorded on ATO systems. About half as many 2012–13 tax returns have ‘unknown’ status as compared to 2011–12 returns because we have now identified a requirement for them to lodge.

As outlined later in this report, 51,000 taxpayers in the taxable payments reporting industries that were not known to be in business, and therefore did not have a lodgment obligation recorded on ATO systems have now lodged a 2012–13 tax return. It is likely that the existence of the reporting system has prompted these taxpayers to re-join the tax system ahead of possible detection through data matching.

Chart 1: Income tax return lodgment status. All contractors in the taxable payments reporting system whose incomes have been reported.

*Unknown include ‘further return not necessary’, ’not on calendar’ or no record of an obligation to lodge on ATO systems.

Activity statement lodgment

Analysis of activity statement lodgments by contractors that have had their incomes reported under the taxable payments reporting system shows that there has been a small increase in the number that have lodged all their activity statements for 2012–13 as compared to 2011–12. Similarly, the number that have lodged at least some of their 2012–13 activity statements has also risen from 2011–12.

The increase in the number of contractors that have an obligation to lodge an activity statement may be a reflection of over 50,000 that were brought into the PAYG Instalments system through lodging tax returns containing business income for the 2012–13 year. Entering the PAYGI system will in many cases have meant that these contractors now have activity statement obligations. More detail about PAYGI follows later in this report.

Chart 2: Activity statement lodgment. All contractors in the taxable payments reporting industries that had their incomes reported under the system.

 Chart 2: Activity statement lodgment. All contractors in the taxable payments reporting industries that had their incomes reported under the system
Obligations reported on activity statements

The total value of obligations reported on these activity statements has also increased. Net GST increased 6.1% and PAYG withholding has grown by 7.9% from 2011–12 to 2012–13.

Table 1: Amounts reported on activity statements. All contractors in the building and construction industry that had their incomes reported under taxable payments reporting.
2012

($ billion)

2013

($ billion)

% change
Total Net GST $7.8

$8.3

6.1%

Total PAYGW * $13.1

$14.2

7.9%

*Includes amounts reported through the large withholder system

Taxpayers brought into the system

As a consequence of lodging tax returns, 50,306 taxpayers identified as payees through the taxable payments reporting system, entered the Pay as you go instalments (PAYGI) system since the commencement of taxable payments reporting.

After entering PAYGI, these taxpayers receive regular activity statements including a PAYG instalment amount to cover their current year tax liability. It will consequently be harder for them not to comply. These 50,306 taxpayers have had nearly $358 million in PAYG Instalments included on their activity statements as follows:

Table 2: Increase in Net PAYG instalments reported on activity statements
Financial year Net PAYGI

($ million)

2012-13

$142.8

2013-14

$214.8

Total

$357.6

Changes to PAYGI thresholds may result in some of these contractors exiting from the PAYGI system in future years.

Businesses operating outside the system

Taxable payments valued at $2 billion have been reported as paid to 59,098 contractors (mostly individuals) that were not previously identified on ATO systems as being actively engaged in a business operation. While these contractors had an ABN, they were not classified as being business taxpayers on ATO systems and had not reported business income in 2011–12.

Just over 86% of these contractors have now lodged a 2012–13 tax return and a further 11% are overdue and will be subject to compliance activity. The validity of indicators such as ‘return not necessary’ is being reviewed, given that these contractors are reported to be in receipt of business income.

Table 3: Tax return lodgments by contractors not previously known to be in business
Client type Lodged Not lodged Not yet due Unknown* Total Payments

reported

($ million)

Individuals

47,423

6,106

769

54,298

$1,211

Non individuals

3,819

347

1

633

4,800

$784

Total

51,242

6,453

1

1,402

59,098

$1,995

*Unknown include ‘further return not necessary’, ’not on calendar’ or no record of an obligation to lodge on ATO systems.

Omitted income

Matching of taxable payments amounts reported with incomes declared in tax returns identifies contractors that on the surface appear to have omitted income from their tax returns. These mismatches need to be investigated to establish that there is an actual omission of income rather than a misreporting, for example where another related entity has reported the income. Work has commenced on a small scale, but it is not yet possible to provide an estimate of the overall likelihood of identified mismatches being misreporting rather than omission of income. The following analysis needs to be read in this context.

Information about reported payments made to individual contractors is available to the contractor or their tax agent through the ATO’s prefilling service. Contractors or their tax agents can access the prefilled information and use it to complete the tax return. Information on 97,773 payments was made available for 2012–13 tax returns. This service is planned to be extended to non-individual entities in future years.

Allowing for GST included in payments, and discounting mismatches with a value below $1000, 53,089 contractors appear to have reported less business income in their tax returns than the amount they are reported to have been paid. The total amount reported to have been paid to these contractors is $41.6 billion. No business income at all was declared by 33,312 (63%) of these contractors in their 2012–13 tax returns.

The chart below shows that the great majority of taxpayers appear to have omitted a moderately low value amount (between $1000 and $10,000). However, there are significant potential omitted income amounts at the higher value end of the discrepancy ranges.

Chart 3: Numbers of contractors that have potential omitted income (over $1000) by value of omission.

Example: case study – omitted income

A home renovation company in Western NSW was reported to have received $2,027,495 in taxable payments. The company’s tax return showed business income of $77,213 had been omitted. A letter was sent to the company seeking explanation. The company’s tax agent agreed that an amount had been omitted from the tax return. The ATO amended the company’s tax assessment to include the omitted income, raising an additional $23,415.30 in tax liabilities, which the company paid by the due date. The agent and the company will be careful to include all its income in the future.

End of example

Missing or invalid ABN

Analysis to match reported payments to contractors on ATO systems showed:

  • 91.6% of transactions were matched to a known taxpayer in the initial process
  • 5.0% were subsequently matched to a known taxpayer after further work
  • 3.4% remain unmatched.

The unmatched reports either do not contain an ABN or contain one that is invalid because it does not have 11 digits, conform to the ABN algorithm or does not belong to the named entity. $1.3 billion was reported to have been paid to contractors that could not be matched. It is unlikely this income has been included in tax returns. We are following up with the reporting businesses to see whether they have additional information that may help identify the contractors. In some cases the reporting business has incorrectly recorded the contractor’s ABN.

Although this level of non-compliance is concerning, it is an improvement over earlier sampling and analysis conducted before the introduction of the reporting system, when over 7 per cent of invoices could not be matched to a contractor on ATO systems. The need to report payments is likely to have encouraged businesses to take greater care in correctly recording their contractors’ names and ABN.

GST and unregistered contractors

Over $426 million in GST is reported to have been paid to 83,770 contractors that do not have an active GST role. It is likely that the businesses making the payments have claimed a GST input tax credit, but the $426 million in GST amount has not been paid to the ATO.

Analysis is being undertaken to determine the extent of possible related entities reporting the GST and other data integrity issues.

Table 4: Contractors with no GST role or role is cancelled or inactive
GST role status Contractors Charged GST GST amount

($ million)

Cancelled/Inactive role

87,975

60,287

$366.9

No GST role

85,507

23,483

$59.4

Total

173,482

83,770

$426.3

Taxable payments annual report lodgments

Nearly 102,000 businesses have lodged taxable payments annual reports including 1.58 million transactions valued at $163 billion. 1.45 million transactions with a reported value of $157 billion have been matched to 479,000 contractors.

Included in the 102,000 reporters are 29,000 that were not identified as having a reporting obligation, because they were not recorded as being within the taxable payments reporting industries. Nevertheless, they have self-assessed a need to lodge and done so.

Reporter lodgment compliance

The original estimate of the population of 160,000 businesses that were identified as possibly having a lodgment obligation has been adjusted to account for the removal of 24,000 businesses that have advised they do not have a lodgment obligation and the addition of 29,000 self-initiated lodgments. This leaves a possible population of 165,000 reporters. Of these, 102,000 have now lodged.

We are contacting businesses in the remaining 63,000 that appear to have a lodgment obligation. Of nearly 1,700 successful contacts, about 48% are claiming that they do not have a lodgment obligation because they did not engage contractors in 2012–13 (32%), have ceased business (8%), or are not in the taxable payments reporting industries (8%).

We are conducting some assurance work around these results. If these findings can be extrapolated across the remaining non-lodger population, there would be 32,827 reporters yet to lodge, or 24%. In the first year of a new obligation, 76% lodgment compliance is a good result in an industry with a longstanding history of poor compliance.

See also:

Summary

The introduction of the taxable payments reporting system in the building and construction industry has resulted in measureable improvements in compliance by contractors and has exposed areas of non-compliance that the ATO is developing or implementing new approaches to address.

In an industry where non-compliance is longstanding and entrenched, continual pressure will need to be applied to lock in the compliance gains made and persuade reluctant contractors to engage with the tax system in a positive way.

The information provided through the system will help the ATO to improve service delivery and make it easier for those that want to comply, but we will also need to make it harder for those that choose not to. The taxable payments reporting system is an effective tool for identifying and targeting these contractors and also for channelling services to those who are willing participants in the tax and super systems.

More information

For enquiries, phone us on 13 28 66 between 8.00am and 6.00pm, Monday to Friday.

For general information, visit:

If you don’t speak English well and need help from the ATO, phone the Translating and Interpreting Service on 13 14 50.

If you’re deaf, or have a hearing or speech impairment, phone the ATO through the National Relay Service (NRS) on the numbers listed below:

  • TTY users – phone 13 36 77 and ask for the ATO number you need
  • Speak and Listen (speech-to-speech relay) users – phone 1300 555 727 and ask for the ATO number you need
  • internet relay users – connect to the NRS on relayservice.com.auExternal Link and ask for the ATO number you need.

Appendix 1: Examples of building and construction services

Below is a list of occupations and work activities that satisfy the definition of building and construction services:

  • architectural work (including drafting and design)
  • asphalt and bitumen work
  • assembly, installation or erection of pre-fabricated houses
  • block laying
  • bricklaying
  • building of room components (for example, kitchens, bathroom components, laundry components, cupboards and similar components)
  • cabinet making (including joinery and off-site fabrication for installation at a building site)
  • cable laying
  • communications construction
  • concreting (including formwork, pouring and finishing)
  • construction and sealing roads
  • construction management
  • decorating
  • demolition
  • distribution line construction
  • drainage work
  • dredging
  • earthworks
  • electrical machinery, heavy, installation (on-site assembly)
  • electrical work (including electrical inspection)
  • electrical construction
  • elevator and escalator installation and work
  • engineering
  • equipment rental with operator (if there is no operator, it is just rental of a good and not a building and construction activity)
  • erection of frames
  • erection of scaffolding
  • excavation and grading
  • fencing
  • finishing
  • flood control system construction
  • flooring (for example, tiling, laying carpet, laying linoleum, timber flooring, floating floors, resilient flooring, slate tiles, and similar flooring)
  • foundation work
  • gas plumbing
  • glass and glazing work
  • hanging or installing doors
  • installation of fittings
  • installation of hard-wired alarm systems (security, fire, smoke and similar alarms)
  • installation of hot water systems
  • installation of pre-fabricated components (for example, kitchens, bathroom components, laundry components, cupboards and similar components)
  • installation of pre-fabricated temperature controlled structures
  • installation of septic tanks
  • installation of solar devices (for example, hot water or electricity connections)
  • installation of tanks
  • installation of window frames
  • installation of windows
  • installation or work on devices for heating and cooling
  • insulation work (walls, roofs, windows and similar structures)
  • internet infrastructure construction
  • irrigation system construction
  • land clearing
  • landscaping construction (including paving and design)
  • levelling sites
  • painting (internal and external surfaces, including roofs)
  • pile driving
  • pipeline construction
  • plastering (or other wall and ceiling construction)
  • plumbing work (including plumbing inspection)
  • preparation of site
  • project management
  • rendering (or other internal or external surface finishes)
  • retaining wall construction
  • river work construction
  • roofing and guttering
  • sewage or stormwater drainage system construction
  • stonework
  • surveying
  • swimming pool installation
  • swimming pool construction (below ground concrete or fibreglass)
  • tiling (walls and similar structures)
  • timber work
  • wallpapering
  • waterproofing interior and exterior surfaces
  • weatherboarding.

Appendix 2: Examples of buildings, structures, works, surfaces or sub-surfaces

Below is a list of what we consider to be buildings, structures, works, surfaces or sub-surfaces:

  • aerodrome runways
  • apartments
  • breakwaters
  • bridges
  • canals
  • commercial buildings
  • communications, internet and electrical infrastructure
  • dams
  • duplex houses
  • electricity power plants
  • elevated highway
  • flats
  • footpath, kerb and guttering
  • furnaces
  • garages
  • golf courses
  • harbour works
  • high-rise flats
  • highways
  • housing buildings (including pre-fabricated housing)
  • industrial buildings
  • jetties
  • lakes
  • mine sites
  • office buildings
  • oil refineries
  • parking lots
  • pipelines
  • power plants
  • railways
  • roads
  • semi-detached houses
  • sewage storage and treatment plants
  • sheds
  • sports fields
  • streets
  • television or radio transmission towers
  • tunnels
  • water tanks
  • waterworks.