Don’t Be Liable for Your Subcontractors Tax Obligations

Subcontractor Agreements to Avoid Potential ATO Liability

Overview

Subcontractor Agreements designed to combat changes in legislation made by the ATO, which now requires certain Industries that use Subcontractors to have formal agreements in place to avoid potential liability, and of course the 10’s if not 100’s of thousands of dollars that go along with that liability. 

So today we are going to discuss,

• What industries are affected by the ATO’s changes in legislation,
• What are the potential costs of not having Subcontractor Agreements in place?
• What steps you can take to avoid 10’s if not 100’s of thousands of dollars of potential liability

Legislation Changes

Now you may or may not be aware that in 2018 and 2019 the ATO introduced TPAR or Taxable Payments Annual Report. It requires all businesses in the

Building and Construction industry,

Commercial Cleaning Industry,

Courier and Transport industry,

IT Services,

and the Security Industry

to file annual reports detailing any payment made to Subcontractors in the previous 12 months.

I imagine most business owners are aware of their TPAR requirement,  but just in case your accountant hasn’t made you aware, or you have only just started using Subcontractors, let’s quickly review the new ATO requirements.

So, as it details, if you are in the,

• Building and construction industry,
• Cleaning Industry,
• Provide Courier or Road Freight Services,
• Information Technology or
• Security Services

you are required by law to submit a Taxable Payments Annual Report.

Now I would suggest that the Building and Construction Industry uses subcontractors and therefore require Subcontractors Agreements but all the rest being cleaning, courier and freight, IT Services and Security don’t use Subcontractors but instead use Independent Contractors.

Potential Tax Liabilities

Now I hear you say, yep Paul I see that businesses in those industries need to submit Annual Payment Reports but what’s that got to do with Subcontract Agreements.

Well, here we go, and this is the reason why now, more than ever, you should ensure that your business has a formal agreement with your Subcontractors.

Contractors reminded to declare $172 Billion, with a B, of Income.

The Australian Taxation Office (ATO) has revealed it is using data from its Taxable Payments Reporting System (TPRS) to ensure that more than $172 billion of payments to contractors have been properly declared.

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 the ATO of payments made to contractors annually.

 “More than 158,000 businesses have now reported all payments made to contractors in the 2019–20 year to us. This data, combined with our sophisticated data and analytics capability, means our field of vision to detect unreported income is better than ever.”

 The ATO is using the data to proactively contact contractors to make sure they haven’t forgotten to declare the income reported through the TPRS.

 And don’t think just because you’re not in the declared industries that you don’t have to worry about having a Subcontractor Agreement.

 Look at this

 The ATO encourages the community to report suspected tax evasion by Competing a Tip-Off Form

 So, it doesn’t matter what industry you are in. Business’s need to formalise their relationships with their Subcontractors.

WOW - an actual Tip-Off Form that you download from the ATO Website.

Foreseeable Conclusion

What do you think happens when one of your Subcontractors, who haven’t paid their tax on 172 Billion, is contacted by the ATO (ATO doing exactly what you just read) and asked for a please explain?

I don’t think it will take long before you hear the words, Oh I thought I was an employee, or well I have been thinking about it, and I would probably class myself as an employee rather than a Subcontractor.

Who do you think is going to be the next business on their call list?

Real-Life Example

Actually, one of my clients had a classic example of this happening not that long ago. He is a Civil Contractor who owns his own earthmoving equipment, Bulldozers, Trucks, Trailers etc. but he also uses outside Subcontractors. These were businesses that owned their own Trucks, Trailers, Excavators etc who he would Subcontract out work to when he had the need.

Now it wasn’t the ATO that came knocking, it was actually Work Cover. He received a letter in the mail saying; hey we don’t think that these Subcontractors of yours are actually Subcontractors, (and here is the point) we class them as Employees, and here is an invoice for $250 000 for the last 5 years of Work Cover payments.

The problem is, how do you fight a bureaucracy like that?. You can say that their Subcontractors as much as you like, but unless you have a Formal Agreement in place, there isn’t much you can do.

So your potential liability can actually, in fact, come at you from a couple of different directions, which is why we always recommend to our clients to get a Formal 12-month Subcontractor Agreement in place, which you sign every twelve months. It clearly formalises the relationship and establishes a clear divide between your business, and that of your Subcontracts.

After all it doesn’t take a rocket scientist to realise that with the ATO chasing taxation owed on 172 Billion dollars and remember that’s just for that particular year. It will more than likely be the same this year, next year and the year after.

If you would like to know more about "How You Can Protect Your Business From Potential Subcontractor Taxation Liabilities" please feel free to request our FREE Facts Sheet here.

That’s It From Me, Until Next Time

Have a Great Day