Do you hire subcontractors? Welcome to a new reporting regime

The ATO’s new rules for cleaners, trolley collectors and couriers

Subcontracting is the heart and soul of many industries. Rather than going to the effort and paperwork of hiring your own staff, contracting labour provides a degree of efficiency.

Jero recently started his own courier business. He makes sure law firms and medical businesses receive their important documents and items on time. While he has a head office and a few key administrative staff, the actual work of transporting these items is performed by a network of contracted couriers. This allows him to provide his services across both Melbourne and Sydney.

You don’t need to manage the detail of every aspect of your service provision. You entrust your subcontractors with this. And therein lies the key concept. Trust. As anyone who has hired contractors previously knows well, the inability for your contractors to perform at expected standards, in any area of their operations, ultimately comes back to bite your business.

Jero has a strict induction process when he contracts couriers. He makes sure they understand the processes and requirements of his business, from human resources and payroll to safety and risk management. In particular, he explains the specifics of courier work within the legal and medical industries. However, there is a limit to how closely he can monitor and manage the network of couriers he contracts over two cities.

These standards need to be upheld by you. But what happens when the ATO shifts the tax regime, and so changes the standards for how you must pay your subcontractors?

This has just happened for the cleaning, trolley-collection, and courier industries. And this means anyone who works in these industries must take notice, especially since certain payroll concerns can increase the risk of an ATO tax audit.

What’s changed?

From 1 July 2018, the Taxable Payment Reporting System (TPRS) now applies not only to the building industry. Cleaning, trolley-collection and courier businesses will also need to report payments they make to contractors (individual and total for the year) to the ATO in the form of an annual report. This extends the enhanced reporting requirement imposed on the building industry in 2013-14 to other industries that also commonly use subcontraction.

And if you hire any of these subcontractors, then you and your tax accountants need to ensure that you keep to the new reporting regime to a tee.

Jero has maintained consistent methods for his payroll and rostering. His contractors must use both paperwork and software to register hours and invoices. Some of the couriers he hires manage very small operations. He does not report every detail to the ATO, just the minimum of what he knows is required. He is unsure if his subcontractors know about the new reporting requirements. In fact, he is unsure how to explain it to them, and how much he is responsible for reporting payments made to them

The first annual report for affected cleaning and courier companies is due in August 2019. You must include info such as the ABN, Name, Address, Total Annual Amount Paid (Including GST), and Total GST included in the gross.

It’s unlikely that this reporting regime will not extend to other industries. The government’s Black Economy Taskforce has encouraged the further expansion of the system to include labour hire, owner-builders, the home improvement sector, and IT contractors.

How could these changes impact my business?

Jero is not sure what to do next. He has clear financial records. But he also manages more than seventy subcontractors. All them provide invoices for the delivery of medical and legal items, but these invoices come in different shapes and forms. He realises he needs to go back to his payment system and account for the details and payments for each of his contractors, and files the report. August is not that far away. Does he have time, and how will he know he is doing it correctly?

The ATO is keen to clean up the ‘black cash’ economy. They are pushing for greater transparency. They want to make sure all payroll tax payments are recouped. This is why they have put these new rules into place.

Subcontractors are running their own businesses. They are liable for how they pay tax to the ATO; you are not responsible to the ATO if your incorporate subcontractors fail to comply. But if you are working with subcontractors who are not keeping proper payroll or invoice paperwork, then you are will have significant issues with state payroll tax offices and Fair Work. These organisations will look to penalise or tax all parties involved in improper labour practices. Therefore, you need to make sure that you understand the reporting requirements. And make sure that you work with subcontractors who follow them.

And even if you are not a courier like Jero or a cleaner, you can expect to see stricter reporting measures impact your industry in due course.

Of course, this is all the more significant if you operate as a subcontractor in these industries. Are you able to put aside the time required to both understand the new reporting requirements and ensure you report dutifully?

Getting on top of the new regime

The difficulty here lies in getting an accurate and comprehensive report done in time. It’s not simply the matter of reporting by August. It’s a matter of adjusting your payroll and subcontracting processes in order to meet reporting requirements regularly.

Jero now has a better understanding of what reporting is now required of him. But, in so doing, he now realises he has quite a big task ahead of him. He not only needs to go over his payroll and payments for the current financial year. He needs to get in touch with nearly all his 70 contracter couriers and verify the accuracy of their business details and invoicing systems. More than that, if any do not meet the new reporting standards, he needs to adjust his own processes so that he ensures he gets comprehensive invoice, GST, and payment info , year in and year out.

This is where the value of a Virtual CFO becomes evident. CFOs are not only able to ensure businesses meet tax requirements. They assess, update, and analyse the comprehensive operations of a business.

Jero is busy. Like most small business owners, he is consumed by the business of doing business. He realises he doesn’t have the time or acumen to properly adjust his rather ad-hoc system. Likewise, he doesn’t want to get it wrong and invoke a potential tax audit. So he uses contraction to fix his contraction issue. He outsources the analysis and restructure of his payroll and payment system to a Virtual CFO in Sydney. He realises the targeted investment saves him time and money in the long run.

It might seem like simply a matter of keeping on top of your invoices. In a way, this is true. You will be able to best adjust to the Taxable Payment Reporting System (TPRS) if you keep detailed track of the business details, payments, and invoices of your subcontractors and all of their staff.

But this can be a complex matter, especially in the cleaning, trolley-collection, and courier industries. The reason why these types of business are being targeted is because they account for a large percentage of non-compliance in the ‘black economy’. Having the right tax accountant or Virtual CFO in Sydney on your side to carefully help you set up ongoing and sustainable reporting procedures is a long-term investment that can save you time and money – and potentially keep the tax office from knocking on your door.

Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.