Introduced on 1 July 2012, the Regime requires businesses involved in the Building and Construction Industry (BCI) to report to the Tax Office amounts paid to contractors and subcontractors for the provision of building and construction services.
The Tax Office will no doubt use the information contained in the Taxable Payments Annual Reports (“the Report”) to conduct a data-matching exercise, whereby they cross-check that the total of the payments recorded in the Report are declared on the tax returns and BAS of BCI suppliers identified in the Report. On the PSI front, where from a Report it?s determined that a supplier contractor receives a large amount from the one business, an investigation may be conducted by the Tax Office to determine whether that supplier contractor has exceeded the 80% rule contained in the PSI legislation.
STEP BY STEP FLOWCHART – DO YOU NEED TO REPORT A PAYMENT?
We provide the following Step-by-Step flowchart of whether you need to report a payment. Return to this user-friendly flowchart as and when you need to:
We now examine the technical content that underpins this flowchart.
WHO NEEDS TO REPORT?
You will need to report under this Regime if all of the following conditions are met:
- You are carrying on a business that is primarily in the BCI
- You make payments to contractors for building and construction services, and
- You have an ABN.
We now address the first two of these conditions:
CONDITION 1 – Carrying on a BCI business
A purchaser business is primarily in the BCI and therefore will need to report if any of the following apply:
- In the current financial year, 50% or more of your business income is from providing building and construction services
- In the current financial year, 50% or more of your business activity relates to building and construction services
- In the previous financial year, 50% or more of your business income is from providing building and construction services
Although the term business income is not defined in the Explanatory Materials to the legislation, the examples in those Materials seem to suggest gross income is the measure to be used (as distinct from taxable income).
Further to Condition 1, the requirement to be carrying on a business and have an ABN means that individuals not carrying on a business are not required to report. If you are unsure of whether you are carrying on a business, see Taxation Ruling TR 97/11 at paragraph 18.
On this point, the Regime has wide application. “Carrying on a business? generally captures sole trader contractors and other single person operations (who may acquire building and construction services by subcontracting from time-to-time – see later) even where those persons operate under their own name. To be clear, it is not necessary that the purchaser is incorporated, has a business name etc. They may still be required to report.
CONDITION 2 – which payments?
The concept of building and construction services is integral to the Regime. For a payment to be reportable it must be made to a contractor who is providing building and construction services.
A service includes activities such as alteration, construction, demolition, assembly, design, maintenance, inspections, certifications etc. where they are performed on or in relation to any part of a building, structure, works, surface or sub-surface (see complete list of what the Tax Office considers to be a building, structure or surface).
That service must be in relation to building and construction. While a full list of what constitutes building and construction services can be found on the Tax Office website, some of the more common examples that fall within this definition include:
• Architectural work
• Building of components (e.g. kitchens, bathroom components, cupboards etc.)
• Electrical work
• Installation of fittings.
Also in relation to Condition 2, a perception has taken hold that you only need to report payments made to contractors in the building and construction industry (i.e. independent contractors operating as “one person operations”). This perception in large part stems from the Tax Office?s own publications on this topic which are littered with the word “contractors”. This perception is incorrect and if followed will result in incomplete, incorrect reports. All suppliers who provide building and construction services are
“contractors? for the purposes of the Regime. A “contractor? for the purposes of the Report can be an individual, company, partnership or trust – the structure through which they operate does not have any bearing on whether you are required to report a payment that you make to them.
Although a payment may relate to BCI services, and you may be operating primarily in the BCI, there are certain payments that you are never required to report. These include:
1. Where you do not have an ABN – If you do not have an ABN, then you are not required to report. Even where you do have an ABN, to be required to report you must still be carrying on a business in the BCI. Therefore, where your ABN is for another purpose and you are not carrying on a business in the BCI, you will not be required to report BCI payments that you make.
2. Payments subject to PAYG withholding – For example, payments made to the following are not required to be reported:
- Suppliers who do not quote an ABN
- Contractors you engage with whom you have entered into a PAYG Withholding – Voluntary Agreement
- Workers engaged under a labour hire or on-hire agreement.
3. Unpaid invoices – The Regime effectively operates on a payment-made basis (i.e. cash basis). Thus if a purchaser business has received an invoice from a supplier for work the supplier has done or is going to do, but the purchaser has not actually made the payment before 30 June, then it won?t be recorded on that year?s Report. Instead, if it is paid after this date, it will be included in the following year?s Report, even where the purchaser operates on an accruals accounting basis.
4. Payments for domestic/private projects – The Regime does not apply to payments made for private purposes. For example, even if you run a business that is primarily in the BCI, but you make a payment to a contractor for work done on your home (e.g. renovation), then you are not required to report this payment as it is private in nature and does not relate to your BCI business.
5. Payments for materials only – Where an invoice is solely for materials (even from a supplier that offers BCI services) the payment of that invoice does not need to be reported. However, where an invoice is for labour and materials, you must report the whole amount of the payment, including the materials component.