The Importance and Financial
Advantages of having the
Correct Details for Contractors
If you are in the business of courier services, cleaning, building and construction (and related industries like painting, plumbing, electrical, etc), road freight, information technology, security, investigation, or surveillance services, then you are required to notify the ATO of payments made to contractors annually via the ATO’s TPRS (Taxable Payments Reporting System) (AKA TPAR).
The ATO is slowly but surely increasing the list of businesses that need to use the TPRS system.
Your accountant and/or bookkeeper do the TPRS for you using your general ledger system, eg, Xero, QuickBooks, etc.
The ATO wants to eliminate the “shadow economy” through the use of TPRS, in other words, the ATO wants to make sure that every Australian resident person who is paid for services provided to an Australian company for business purposes either,
(1) is registered and therefore the ATO is aware of them,
(2) is registered and therefore required to declare income in a tax return that is accurate (read, not underdeclared), and
(3) that if the person is not registered that the ATO is getting tax income from any payments made to the unregistered person.
Every time you pay a contractor, you need to ensure that the contractor provides you with a valid invoice and a valid ABN number.
The ABN number is used to (1) determine that it is a valid ABN and (2) the contractor’s GST status.
If the contractor does not provide you with a valid ABN number, then, this means that the ATO may not be aware of them, that they do not have a GST status and that in order to ensure that the ATO gets all the tax that it is entitled to, you have to withhold 47% of the amount that you were charged by the contractor and pay this across to the ATO through your activity statement.
For example: If the contractor, with no ABN, charges you $1,100 for services, then when you pay them the consequences for you and the unregistered contractor is as follows:
You will not get a GST input tax credit of $100 and you will have to show the entire amount of $1,100 as an expense in your profit and loss.
When you pay the contractor, you will only pay them $583 while paying $517 to the ATO (being $1,100 x 47%). Understandably the contractor will not like this result.
You then need to complete the ATO document “PAYG payment summary – withholding where ABN not quoted” form for each payment made and give it to the contractor (this is a deliberately painful form for both you and the contractor to deal with).
As a business, you HAVE TO Pay the 47% to the ATO where no valid ABN number is provided by the contractor. If you do not, then you run the high risk that if the ATO determines that the contractor cannot pay his tax liabilities resulting from these payments (eg, contractor is missing, contractor is insolvent, etc), that the ATO will then come to you to pay the shortfall in tax revenue (in other words, continuing with the above example, you would have already paid the contractor $1,100 and the ATO may make you pay a further $517 for the contractors outstanding tax liability).
It is a financial and administration advantage to both you and the contractor to make sure that the contractor has a valid ABN.
Without a valid ABN, there are financial, administrative and potentially tax liability and tax audit risks for both parties.
For your interest, please note the contents of the below article:
Contractors urged to declare more than $172bn of payments
Publicaccountant.com.au – published 31 March 2021
The ATO said it is using the data to proactively contact contractors to make sure they haven’t forgotten to declare the income reported through the TPRS.
Further, the regulator said it is using the TPRS data to draw attention to income from contracting work so that it can be easily added to tax returns at tax time.
The ATO said information reported through TPRS also allows it to check that businesses are registered for GST if required and are using valid Australian business numbers.
Businesses that pay contractors in the courier, cleaning, building and construction, road freight, information technology, security, investigation, or surveillance services industries are required to notify of payments made to contractors annually, the ATO said.
The ATO reminded businesses that deliberately not reporting or under-reporting business income to the ATO contributes to the shadow economy.
Further, it estimated that small businesses operating in the shadow economy cost the community more than $6.7 billion in unpaid tax every year.
ATO assistant commissioner Peter Holt said, because of TPRS, the ATO now has a clearer view than ever before of payments made to contractors in these industries.
“More than 158,000 businesses have now reported all payments made to contractors in the 2019–20 year to us,” Mr Holt said.
“This data, combined with our sophisticated data and analytics capability, means our field of vision to detect unreported income is better than ever.”
Mr Holt said whenever the ATO discovers a discrepancy, its first step is always to contact the taxpayer or their tax professional to check they have fully reported these payments in their tax return.
He encouraged taxpayers who have not declared or under-declared income from contract work to lodge an amendment request or speak to their registered tax professional for assistance.
“Honest courier drivers do the right thing: they pay their rego, pay their road tolls, stick to the speed limit, and pay their taxes,” Mr Holt said.
“It’s not fair that some dishonest drivers get to skip the ‘toll booth’ and get an advantage over their honest competitors.”
Published: 06/04/2021 09h43