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Response to the Consultation Paper:

Reporting of Taxable Payments for Contractors in the Building and Construction Industry

23 June 2011

Background

In the May 2011 Budget, the Gillard Government announced an intention to introduce massive red-tape reporting for self-employed people, but restricting it to the construction sector.

Here's the budget announcement. Read page 47.

Here's what we said at the time (10 May 2011):
    In a startling development contained in tonight's federal budget the Gillard government is moving to destroy independent contractors. And the term 'destroy' is not overstating the development.

    Robert Gottliebsen's analysis of the budget describes how this is to occur. He says
      "The government plans to require that anyone in the building and construction industry who hires a contractor must report to the government every cent they pay to that contractor. And every contractor must report every cent they pay to their contractors. This is part of the vigorous union-encouraged attack that the government is planning on the self-employed Éit will be extended to IT and other areas."

    What the government is doing is tying up contract work in so much red complexity that the practical ability to be self-employed will evaporate.
The Government has now released a "Consultation Paper" to implement the policy. Here's our response to it.

ICA response to Consultation Paper

Overview
Independent Contractors Australia totally rejects the policy announced by the Government in the May 2011 budget.

We view the policy as:
  • a direct and politicized attack against the right and capacity of people to be self-employed in the construction sector.
  • a move by the Government and unions to make the administration of the business life of an independent contractor so complex as to suppress the capacity for individuals to be self-employed and to force them into becoming employees.
  • an exercise in the illegitimate use of the coercive powers of the Australian Taxation Office to pursue an industrial relations goal of the Government---namely, the suppression of the right of people to be their own boss.
In relation to compliance with the taxation system:
  • the Consultation Paper does not demonstrate that independent contractors in the construction sector are any more or less compliant than anyone else operating their own small business. Consequently, we view this red-tape attack against self-employed construction workers as the first phase of a broader red-tape attack to be mounted by the Government against all self-employed people.
  • the current system of taxation reporting is already robust and it is hard to imagine how anyone can fall through the net, unless they have the criminal intent to defraud the Commonwealth by deliberate non-reporting of income. The planned policy, which introduces massive reporting requirements of all transactions, will not do anything to stop the intentional non-reporting of income. It will simply mean that those who do report and who are already honest in their dealings will be burdened with a huge increase in reporting to the ATO. Nothing will be achieved.

Why the current system works (and if it does not, the ATO must be incompetent, which it is not)

The current taxation withholding system is brilliant in its simplicity and capacity to catch all businesses within the taxation system.
  • Entities involved in commercial transactions must have an Australian Business Number which is cross-referenced to individual Tax File Numbers. The ATO has the power to cross reference TFNs with bank account numbers and it does so all the time. Through this integrated cross-referencing system, the ATO is able to track income-reporting in the community with a high degree of accuracy and to profile individuals who are avoiding the full declaration of their income.
  • Where an entity does not have an ABN, the payer of an invoice is required to withhold tax from the service provider and remit the tax to the ATO. Therefore it is in the interests of all individuals to have an ABN.
  • Where the system breaks down and leads to or encourages non-reporting of income, is where the ATO fails to allocate ABNs to individuals. Where individuals are not granted an ABN, they are more likely to enter the 'black' economy and simply not report their income. Under the current Government, there has been an intentional policy of restricting the granting of ABNs. Consequently, the Government has encouraged tax avoidance through non-reporting.
There is nothing in the Consultation Paper or the Government's budget policy paper that indicates how the creation of such a huge transaction reporting system will do anything to capture the non-reporting of income. All the transaction reporting system will do is capture data on entities and individuals who are already reporting.

The Consultation Paper admits that non-compliance with taxation is not something unique to self-employed people. Yet the Government intends to impose massive transaction reporting requirements on self-employed people. If the Government's flawed thinking were to be followed to its conclusion, EVERY transaction in the economy should be subject to reporting to the ATO. For example, every time an individual buys a carton of milk, the transaction should be reported to the ATO lest the milk vendor fails to report the income. It's a prescription for the Nanny State on a grand scale.

Business-to-Business reporting only
The Government intends to limit the transaction reporting scheme to business-to-business transactions only and not apply it to business-to-consumer transactions. However, a massive percentage of the black economy operates in the business-to-consumer sector of the economy. As examples:
  • A handyman fixes leaky pipes in someone's home, is paid cash and does not report the income.
  • A retailer sells an item in her store and does not report the sale in her income return.
The business-to-consumer area is where intentional non-reporting has most opportunity to exists and where it exists most. Yet the Government says that it has no intention to target this area. Why not? We contend that the answer is that the Government knows such a massive transaction reporting system would provoke a massive political backlash from the Australian community. The Government is limiting the reporting system to business-to-business transactions and construction (initially) because it will be largely 'hidden' from public view and is only intended to target its political agenda of suppressing self-employed people.

Specific flaws in the plan

a) The scale of the reporting
Figure 2 (Example of the proposed reporting regime) in the Consultation Paper makes it clear how the reporting system will work. All businesses will have to record and report to the ATO every transaction they have with another business. The increase in red tape this will involve will be massive. Again it will only capture those people in business who already report their income. There is nothing in the scheme that indicates how people who do not report will be captured.

b) Definitions of when to report
The Consultation paper states:
    "The payments that are subject to reporting are payments for a supply, which in this context is a supply made under a contract that is in whole, or in part, for the supply of building and construction services. However, this does not include payments that are solely for the supply of goods or materials, or payments of salary and wages for employees."
It is clear that the reporting requirements are going to generate a huge level of complexity about definitions of what a reportable "service" is and what a non-reportable "supply of a good or material" is as well as what non-reportable "payments of salary and wages for employees" are.

Anyone seeking to comply with the transaction reporting scheme will have to dissect invoices they receive into things that are a 'service' and things that are a 'supply of a good or material'.

c) Time delay in reporting will make the reporting system useless
We ask: Why is submitting a report at the end of the year going to change compliance? When a tax lodgement is done 18 months down the track, there is every chance that the contractor who has been avoiding tax won't be around, will have flown the coop or gone bust. Consequently, the reporting system will not work.

d) The system is able to be subverted
If a project builder wanted to get around the reporting system, instead of having a contract to build a house with a client, it would simply have a contract to manage the building of a house at a pre-determined price, then seek permission from the client to engage contractors on their behalf. In this way the transaction becomes personal, and is excluded from the reporting system.

Questions:
  • How is the ATO going to verify the reported information? Clearly this will mean that businesses will be required to keep all invoices on their files, dissecting the reportable items from non-reportable items.
  • Is the ATO going to have the resources to conduct field inspections of all business files to ascertain if dissection has been accurate, inaccurate or fraudulent?
  • Why does the Government think that someone supplying a good or material is less likely to report his income than someone supplying a service?
  • Why does the Government think that someone using employees is likely to be honest in their reporting of income whereas someone who is self-employed is likely to be dishonest and not report income? It seems to us that this is more a matter of the government deciding it does not like people being self-employed and intends to discriminate against them by imposing a massive red-tape burden upon them.
PPS
The Consultation Paper draws on the old and discarded withholding system called the PPS which was used in the construction sector before PAYG was created (including integration with the BAS and ABN). It is clear that the new transaction red-tape reporting system is a return to a hybridized but worse form of the old PPS system. PPS was entirely discredited as ineffectual and wasteful. It was rejected and dumped. The new transaction red-tape reporting system is a return to a version of this discredited PPS system.

Conclusion
The Consultation Paper finishes by asking this question:
    "Are there any other administrative arrangements or mechanisms that could be adopted for this measure to reduce the compliance burden on businesses and contractors"
The answer is 'Yes!'

This planned red-tape transaction reporting system will add massive compliance burdens and costs to all self-employed individuals conducting their own business in the building sector. It will do nothing to increase reporting and do nothing to stop individuals who do not report their income so as to avoid tax. The answer to the question is that the planned new system should be rejected and not proceed.


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