Review into the Australian Taxation Office’s employer obligations compliance activities

The IPA welcomes the opportunity to provide a submission into the Review of the Australian Taxation Office’s employer obligations compliance activities.

The IPA is a professional organisation for accountants who are recognised for their practical, hands-on skills and a broad understanding of the total business environment.  Representing more than 35,000 members and students in Australia and in more than 81 countries, the IPA represents members and students working in industry, commerce, government, academia and private practice. More than 75 per cent of our members work in or with small business and SMEs and are recognised as the trusted advisers to these sectors. 

Employers have to comply with a multitude of other taxation and legal obligations both at the Federal and state levels. These include obligations under the superannuation, Pay As You Go (PAYG) withholding and Fringe Benefits Tax (FBT) regimes. The regressive nature of compliance costs on small businesses has always been a concern for the IPA. We welcome any review that helps unshackle the small business sector and makes life simpler for small businesses, especially when it comes to their interaction with the tax system. The important role entrepreneurs can play in Australia's future economic growth cannot be understated. A strong and vibrant small business sector can play an active role in contributing to the economic growth of the Australian economy.

Many of the issues we will raise in this submission relate to the existing legislation framework which creates onerous compliance obligations on particularly small employers. Our submission to the Board of Tax into their review of Review of Tax Impediments Facing Small Business details our concerns in relation to systemic issues with the current legislative environment. The Government has already implemented a joint agency initiative called the Small Business Fix-it Squad which involves small business owners working with Federal, state and local government regulators to identify and consider options for improving the broader operating environment for small businesses in response to some of the concerns raised in this review.

A significant number of small businesses do not have employees. Whilst most are one person businesses, the issue of why there is reluctance for small businesses to employ people, would in part be attributable to compliance obligations imposed on entities associated with employment. These compliance burdens impose substantial costs of time and money, which when combined with other non-tax regulations impose disincentives to employing staff.

Any improvements to ease compliance burdens associated with employer obligations would be most welcome to encourage more small businesses to employ.

Specific comments in relation to the Review into ATO’s employer obligation compliance activities, as follows: 

• Firstly in relation to Superannuation and Superannuation Guarantee (SG). The harshness of the penalty regime can lead to further non-compliance delays in employers making superannuation contributions. The current onerous penalty regime has done little to address the problem of unpaid superannuation. Whilst a penalty regime is required to ensure employers meet their statutory employee obligations, the harshness of the current regime is considered excessive, especially for the small end of town. The Government has already reduced small business superannuation compliance by expanding the small business superannuation clearing house. In addition it is in the process of reducing some of the harshness of the SG penalty regime (Superannuation Guarantee Legislation Amendment Simplification Bill 2015). Both these changes are positive improvements to reduce small business superannuation compliance costs, however whilst these changes lessen the penalty regime and the compliance burden, we still are of the opinion that the non-deductibility of late SG contributions when paid, is a harsh unreasonable outcome. The interest charge, administrative fee and potential penalties are sufficient incentives for an employer to meet their SG obligations rather than pay the SG charge. It is important to strike the right balance so an equal playing field is maintained between employers who pay super on time and those who do not. Late payment of SG contributions still require the employer to lodge an SG statement with the ATO when the entity becomes liable for the SG charge. As recommended by the Board of Tax into its Review of Tax Impediments Facing Small Business, the requirement to complete and lodge an SG charge statement should be removed. The employer should instead be required to pay the late superannuation contribution and the associated interest directly to the superannuation fund and only forward details to the ATO if requested. The introduction of Single Touch Payroll reporting may offer further opportunities to ease compliance burdens and assist the ATO in detection of unpaid SG when it is implemented. 

• Our second issue relates to employee and contractor distinction. The rules surrounding the ‘alienation of personal services income’ (PSI) were introduced in July 2000, primarily to enable taxpayers to self-assess as to whether they operate as a personal services business.  Taxpayers unable to satisfy the PSI rules would have their income attributed back, irrespective of whether they operated through an interposed entity. Whilst we are supportive of the policy intent of the legislation, we believe the existing framework needs to be reviewed to provide more certainty, ease compliance and reduce complexity. The PSI rules are relevant for small businesses and therefore need to be clear, understandable and conducive to the average taxpayer being able to discharge their obligations with certainty. There is too much uncertainty as to the interpretation of key elements of the law. The use of interposed entities is often a legitimate commercial means by which contractual arrangements can be satisfied.  It should not be viewed prima facie as an attempt to engage in income splitting and/or tax deferral. The use of personal services entities continues to expand in line with the growth of flexible workplace arrangements. To promote economic growth, Australia requires a tax system which is consistent, cognisant of commercial reality and encourages productivity.  Accordingly our taxation system should acknowledge the real benefits of contracting arrangements.  

Whilst the ATO provides guidance tools for employers to assist with the distinction between employee and contractor, there is no protection afforded to those relying upon the information. The balance of power is with employers who often dictate terms. It is not an uncommon scenario were prospective service providers are force to provide their labour as contractors in order to win the engagement. There needs to be a way to respect the commercial arrangements entered into by both parties that does not later gives rise to unexpected liabilities. 

The taxable payment reporting system for the building and construction industry introduced in 2012 has improved tax compliance by contractors but has also exposed areas of non-compliance. If extrapolated to other industries, it could amount to significant amount of non-compliance in the Australian economy. 

• Our third issue relates to Fringe Benefits Tax employer obligations. A comprehensive review of FBT legislation is required to ease employer compliance issues.  Since its introduction in 1996 there have been significant changes to the workplace that cannot be accommodated by the existing legislative framework. Recent legislative changes constitute a ‘band aid’ approach to addressing systemic FBT problems. FBT is an inefficient tax, intended as a disincentive, rather than a source of revenue.  FBT incurs the highest compliance cost relative to the revenue generated and there is considerable scope to reduce the compliance burden on small businesses; including the small Not-for-Profit (NFP) organisations. The FBT valuation and apportionment methodologies impose unnecessary compliance costs on small employers. Salary packaging arrangements add to administration and increase recording and reporting requirements. The complexity of the FBT system is exacerbated by the fact that the incidence of the taxation of fringe benefits falls on employers.   The taxation of fringe benefits to employers requires supplementary rules to ensure fringe benefits are factored into the various means tests in the tax and transfer system; such as family tax benefits and parenting payments. In many overseas jurisdictions, fringe benefits are taxed in the hands of employees.  It is the Institute’s view that the taxation of fringe benefits at the employee level has the potential to deliver greater neutrality in the treatment of cash and non-cash remuneration; whilst simultaneously reducing compliance costs for all parties. Benefits that can be readily valued and assigned to an employee should be taxable in the employee’s hands and reportable for transfer purposes. The taxation of fringe benefits in the hands of employees would also alleviate the inequitable application of the top marginal tax rate to fringe benefits, which is currently applied irrespective of the income of the employee. The Henry Review supports the transfer of FBT to employees. Other benefits incidental to an individual’s employment or otherwise difficult to assign, should be taxable to the employer. This approach would provide a more neutral taxation outcome by removing the need for the current grossing–up process and would facilitate the consistent and equitable treatment of fringe benefits for means tested taxes and transfer payments.

As stated in the opening comments, most of our concerns relate to the legislative framework. There are opportunities to ease the compliance burden whilst ensuring that the relevant taxes and superannuation entitlements are paid.  

The IPA welcomes the opportunity to discuss further any of the matters we have put forward in our submission. Please address all further enquires to myself

([email protected] or 0419 369 038).

Yours sincerely,

Tony Greco FIPA

General Manager Technical Policy

Institute of Public Accountants