HG Building and Construction Alert: Building and construction companies to report payments made to contractors - 27 Jan 2012

Late last year, the Treasury released draft regulations whereby businesses in the building and construction industry will need to annually report payments made to contractors. The regulations apply to a wide range of building and construction services, including building alterations and demolitions.

Here, Taxation and Revenue special counsel Justin Byrne outlines what building and construction companies need to know about the draft regulations.

Key points

  • The Treasury's draft regulations require businesses operating primarily within the building and construction industry to report any payments they make to contractors to the ATO on an annual basis.
  • The reporting requirements will apply where there has been a supply of building and construction services, or a combination of building and construction goods and services in some circumstances.

Improving compliance in the building and construction industry

The draft regulations were introduced as a result of a 2010-11 Federal budget initiative to improve compliance with taxation obligations amongst contractors in the building and construction industry. ATO research has suggested that out of the six major industries, building and construction was responsible for 60 percent of all tax related debt for the 2006 and 2009 income years. The draft regulations follow on from a consultation paper issued in May 2011, and are proposed to apply from 1 July 2012.

Who will the regulations apply to?

The regulations will apply to businesses that utilise the services of a contractor if:

  • the business is 'primarily' in the building and construction industry (the regulations will apply if a business derives more than 50 percent of its income from 'building and construction services' in the current financial year or two most recent financial years);
  • both the business and the supplier have an ABN; and
  • building and construction services are supplied, or a combination of goods and building and construction services are supplied (and supplying the services is not merely incidental to supplying the goods).

'Building and construction services' encompasses a wide range of activities performed on, or relating to, buildings, structures, works, surfaces or sub-surfaces, from alterations to demolitions. A list of included activities can be found in the draft regulations, while the accompanying explanatory statement contains further examples.

Where goods and services are supplied in combination, businesses contracting the services will only be exempt from the reporting requirements if the supply of services is simply incidental to the supply of goods. For example, a tradesperson purchasing paint from a store that also provides a tinting service will not be required to report payments made to the store (as the tinting is an incidental service).

Who is excluded from the regulations?

The regulations will not apply to:

  • payments between members of the same consolidated or multiple entry consolidated group for income tax purposes;
  • payments made to individuals or entities without an ABN; and
  • payments made to individuals or entities whose tax is withheld under the PAYG system (eg employees).

How will payments be reported?

The draft regulations require businesses to report to the ATO any payments made to contractors under division 405 of the Taxation Administration Act 1953 (Cth). Division 405 requires quarterly reporting, and while the consultation paper suggested that only annual reporting would be required, this does not seem to have been adopted in the draft regulations.

Businesses will be required to outline the contractor's name, ABN, address (if known), the total amount paid or credited to the contractor over the income year, if GST has been charged, and any other information required by the Commissioner.

Submissions on the draft regulations closed recently, and the Government will now work to finalise the regulations, with a view to implementation on 1 July 2012.

For more information on how the draft regulations will affect businesses in the building and construction industry, please contact HopgoodGanim's Taxation and Revenue team.