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Period of Review Changes Coming for SMEs

At the start of the COVID-19 pandemic in 2020, the previous government passed a measure to increase the small business threshold from $10m to $50m for the purposes of most of the small business exemptions. This was part of a Bill to implement various Budget measures for economic recovery.

Among other things, this legislation meant that the Commissioner was only able to amend an income tax assessment of “medium businesses” (those with a turnover between $10m and less than $50m) for a limited period of 2 years. The Commissioner was still able to amend an assessment at any time if fraud or evasion was expected or to give effect to an objection made by the taxpayer or a decision on review or appeal.

While the current government is not seeking to disturb a majority of the measures contained in the legislation, it has recently introduced a proposal to exclude certain small and medium entities (SMEs) from the shorter 2-year amendment period and revert those entities back to the standard 4-year period.

Draft Regulations have been released to exclude certain entities with particularly complex tax affairs or significant international tax dealings from the shorter period of review, which according to the government is in line with the original intentions of the 2020-21 Budget announcement.

Entities which would be subject to a longer period of review should the Draft Regulation be registered include:

  • those with related-party dealings in relation to assets or non-cash benefits with a market value of at least $50,000.
  • entities that derive an assessable income of at least $200,000 from any source that is not an Australian source. To prevent structuring arrangements being undertaken to avoid this, the $200,000 threshold is assessed as a combined threshold including the assessable income from the relevant assessed entity and any entity affiliated with or connected with the entity.
  • foreign controlled Australian entities (including Australian companies, trusts and partnerships) and non-resident entities at any time during the income year.
  • any entities that engage in schemes captured by either the Diverted Profits Tax (DPT) or Multinational Anti-avoidance Law (MAAL).
  • certain entities with at least 10 other entities connected with or affiliated with the entity at any time during the assessment year.
  • entities that may be entitled to the R&D tax offset or certain related deductions, recoupments and adjustments, and
  • entities that claim the following CGT relief:
    • restructure rollover relief
    • demerger relief
    • rollovers relating to CGT asset transfers between 2 companies or the creation of a CGT asset between companies within the same wholly owned group, where one company is a non-resident, and
    • entities subject to Div. 855 (where a foreign resident can disregard a capital gain or loss in certain circumstances).

The Draft Regulations also seek to remove the current requirement that a 4-year period of review only applies where at least one of the related parties already has a 4-year period of review in relation to related party dealings. This means that even if all related parties have a 2-year assessment period, if all other conditions are satisfied, a 4-year period of review may apply to a relevant assessed entity. The above amendments will apply to assessments made after the Regulations commence for income years starting on or after 1 July 2021.

What does this mean for your business?

With these potential changes on the horizon, will your business be affected? We can help you get ready or make a submission on your behalf in relation to these changes. Contact us today for expert help and advice.

Top tips for managing payroll as an employer

We’ve just entered a new financial year, so chances are you might be forward planning for 2022/23, and have identified that there’s capacity to grow your team.

One of the most common challenges small-business owners face with expanding your team is navigating employer obligations when it comes to payroll. Here are some tips to help managing payroll as a small-business owner/employer.

Explore your employment types and your options

Before hiring, it is important to consider what your business needs to succeed, and what it can afford. Look at historical data, as well as your budget and forecast to determine what is feasible. If you are about to enter a busy period and predict it will quieten down and return to normal again, a casual or contract role might suit you better. On the other hand, if your data shows you that the work and sales are consistent and you are struggling to find time in the day to do it all, then a full-time role may be good for you.

Knowing your employment types and the obligations associated with them, such as award rates (which vary by sector, experience and whether the employee is taking an apprenticeship or other scheme), sick leave and holiday pay, is essential before you start the hiring process.

Look to cloud-based tools to streamline your payroll

Apart from ensuring you’re paying award rates at a minimum and submitting employees’ payments on time, there are a number of elements to consider when it comes to your tax obligations with the ATO. For example, PAYG withholding is where your employer automatically withholds a portion of your gross wage or salary for tax purposes. PAYG withholding must be done for all employees. Furthermore, it needs to be reported to the ATO with every pay cycle, and year end data has to be submitted with each financial year (the cut-off date being 14th July), so that employees can lodge their personal tax returns.

The government introduced single touch payroll (STP) in 2019, which is where payment details are lodged via digital means. It is advantageous to employers as it frees up a lot of the manual data entry that was once required.

Most affordable accounting and bookkeeping service providers (e.g. QuickBooks, Xero, and MYOB) provide payroll functionalities, and are also integrated with STP. Your cloud-based payroll platform can be connected to the ATO portal, which means you can generate and send reports while preparing employees’ payments, saving you a lot of time in the process.

Take time to understand and comply with superannuation requirements

Superannuation is compulsory and paid in addition to employees’ wages and salaries. The super guarantee (minimum amount you need to pay) increased from 10% to 10.5% on 1 July 2022. If you haven’t already done so, your payroll software must be updated in order to account for the change.

Cloud-based providers are useful here as you can configure your payroll and STP so that superannuation is automatically included. Make sure you provide new employees with a superannuation standard choice form, where they provide their chosen fund’s details.

You also need to select a default super fund for the business, where you pay employees if they don’t have a preferred fund, or a stapled super fund.

Super needs to be paid quarterly – by 28 October (Q1), 28 January (Q2), 28 April (Q3) and 28 July (Q4) each year. If not, you will need to pay a super guarantee charge.

Need help with managing your payroll?

Hiring and then managing payroll and its associated legalities can be a little daunting, however, a tech-based solution is ideal for small-business owners navigating this process. It’s both user-friendly and affordable, meaning you can get more hours in your day for other business processes. If you require assistance with payroll management and compliance to legalities, contact us today.

The importance of record keeping

You are legally required to keep records of all transactions relating to your tax and superannuation affairs as you start, run, sell, change or close your business, specifically:

  • any documents related to your business’s income and expenses;
  • any documents containing details of any election, choice, estimate, determination or calculation you make for your business’s tax and super affairs, including how any estimate, determination or calculation was made.

You should make sure that you understand what records are needed for your business and make accurate and complete record-keeping practices a part of your daily business activities. Talk to your tax advisor about what records your business needs to keep and for how long.

What is a record?

A record explains the tax and super-related transactions conducted by your business.

The record needs to contain enough information for the ATO to determine the essential features or purpose of the transactions.

The minimum information that needs to be on the record is generally:

  • the date, amount, and character (for example, sale, purchase, wages, rental) and the relevant GST information for the transaction;
  • the purpose of the transaction; and
  • any relevant relationships between the parties to the transaction.

Five rules for record keeping

The ATO has 5 record-keeping rules, which are based on law and the ATO’s views.

  1. You need to keep all records related to starting, running, changing, and selling or closing your business that are relevant to your tax and super affairs – if your expenses relate to business use and personal use, make sure you have clear documents to show the business portion.
  2. The relevant information in your records must not be changed (for example, by using electronic sales suppression tools) and must be stored in a way that protects the information from being changed or the record from being damaged – you need to be able to reconstruct your original data if your record-keeping system changes over time.
  3. You need to keep most records for 5 years – generally, the 5-year retention period for each record starts from when you prepared or obtained the record, or completed the transactions or acts those records relate to, whichever is later. However, in some situations, the start of the 5-year retention period is different. For example, for super contributions for employees, the 5 years starts from the date of the contribution. You need to keep all information about any routine procedures you have for destroying digital records.
  4. You need to be able to show the ATO your records if they ask for them. The ATO will also need to be able to check that your record-keeping system meets the record-keeping requirements – if you store your data and records digitally using an encryption system, you will need to provide encryption keys and information about how to access the data when asked. You also need to ensure the ATO can extract and convert your data into a standard data format (e.g. Excel or CSV).
  5. Your records must be in English or able to be easily converted to English.

Need help with record keeping?

Keeping correct records is very important. Failing to do so could have financial consequences. We can help you with your records. Contact us today for more information.

Professional Firm Profit Allocations: ATO View

If you run a professional services firm there are many tax issues to consider in the allocation of profits. The ATO is particularly concerned about individual professionals with an ownership interest who redirect their income to an associated entity, such as a trust, with the effect of significantly reducing their tax liability – raising the prospect that anti-avoidance provisions could apply. From 1 July 2022, new guidelines explaining the ATO’s compliance approach to profit allocations will commence. These guidelines assist taxpayers to identify their particular risk level and understand whether their profit allocation arrangement may attract attention from the ATO.

The new guidelines (PCG 2021/4) are significantly different to previous ATO guidance. Importantly, the ATO acknowledges that some arrangements that were previously considered “low risk” may now have a higher risk rating.

Before speaking to your advisor, it may help you to understand the new two-step process for identifying your risk.

Step 1: Pass the “gateways”

For the guidelines to apply to your profit allocation arrangement, you must satisfy two “gateway” tests.

Firstly, does the arrangement have a sound and genuine commercial rationale? The ATO suggests that a change in tax performance, absent any other non-tax related practical changes, strongly indicates a lack of commercial rationale.

Secondly, are you satisfied that the arrangement has no “high risk” features? This includes anything flagged in a Taxpayer Alert, as well as the following:

  • Financing arrangements related to non-arm’s length transactions. For example, where an associated entity borrows to acquire the individual’s ownership interest and claims deductions for interest expenses.
  • Exploiting artificial differences between taxable income and accounting income.
  • Where a non-equity partner assigns their fixed-draw income to their associated entity.
  • Multiple classes of shares and units held by non-equity holders.

If you don’t meet these two tests, the guidelines don’t apply and you should seek professional advice.

Step 2: Identify your risk

If you pass the gateways, the next step is to consider three risk assessment factors (or two, if the third is impractical) and use the tables in the ATO’s guidelines to identify your “score” for each factor. The total of your scores – adjusted for whether you apply two or three factors – will determine which risk “zone” the arrangement falls into: low, moderate or high risk.

The three factors are:

  1. Proportion of the income entitlement assessed in the hands of the individual professional (as opposed to their associated entities) – the greater this proportion, the lower your risk score.
  2. Total effective tax rate for income received from the firm by the individual and associated entities – the higher the effective tax rate, the lower the risk score.
  3. Remuneration assessed in the hands of the individual as a percentage of a commercial “benchmark” for the services provided to the firm (optional) – higher percentages yield a lower risk score.

Your advisor can help you perform these calculations.

If your arrangement is in the “low risk” zone, you can have confidence that the ATO will generally not dedicate compliance resources to testing your arrangement. If it rates as “moderate” or higher, the ATO is likely to analyse your situation further. Arrangements that were previously “low risk” but now have a higher rating may qualify for a transitional period until 30 June 2024 in which to apply the ATO’s previous guidance.

Now is the time to take action

The ATO says taxpayers should self-assess their risk annually, document the assessment and be able to provide supporting evidence in the event the ATO fact-checks the assessment. Contact our office for expert assistance in assessing and managing your risk.

Single Touch Payroll: Phase 2

Single touch payroll (STP) has now entered into Phase 2, although most employers may not yet be reporting under this phase as many digital service providers (DSP) have obtained deferrals to help get their software ready and help their customers transition. Essentially, STP works by sending tax and super information from an STP-enabled payroll or accounting solution directly to the ATO when the payroll is run.

Entering Phase 2 means that additional information which may not be currently stored in some employers’ payroll systems will need to be reported through the payroll software. A salient example is the start date of employees. While many newer businesses may have that handy, older businesses may have trouble finding an exact start date, particularly for long serving employees. In those instances, the ATO notes that a default commencement date of 01/01/1800 can be reported for STP Phase 2 purposes.

Employers will also be required to report either a TFN or an ABN for each payee included in STP Phase 2 reports. Where a TFN is not available for an employee, a TFN exemption code must be used. If a payee is a contractor and employee within the same financial year, both their ABN and TFN must be reported.

In addition to reporting TFNs and commencement dates for employees, employers are now also required to report the basis of employment according to work type. That is, whether an individual is Full-time, part-time, Casual, Labour hire, voluntary agreement (contractor with own ABN but in a voluntary agreement with business to bring payments into the PAYG system), death beneficiary, or non-employee (i.e., not in the scope of STP but included for voluntary reporting of super liabilities).

The report generated from STP Phase 2 will also include a 6-character tax treatment code for each employee, which is a shortened way of indicating to the ATO how much should be withheld from payments to employees. Most STP solutions will automatically report these codes, but employers should still understand what the codes are to ensure that they are correct. For example, RTSXXX refers to regular (R) employees with a tax-free threshold (T), who have study and training support loans (S), who have not asked for a variation of amount withheld due to Medicare levy surcharge (X) or Medicare levy exemption (X), or Medicare levy reduction (X).

The income and allowance details attributed to employees will also be further drilled down in Phase 2. For example, instead of reporting a single gross amount of income, employers need to separately report on gross, paid leave, allowances, overtime, bonuses, directors’ fees, return to work payment (lump sum W) and salary sacrifice amounts.  

While STP Phase 2 commenced on 1 January 2022, most DSPs have obtained deferrals which cover their customers. This means that if your DSP has a deferral in place, you do not need to apply for your own deferral and will only need to start reporting Phase 2 information from your next pay run after your DSP’s deferral expires. However, if your business needs more time in addition to your DSP’s deferral, you can apply for your own deferral online.

Need help to comply with Phase 2?

Payroll is complicated, and if your business needs more help to understand the extra information required for Phase 2 reporting, we can help. If your DSP is ready for Phase 2 reporting but you need more time, we can also help you to apply for a deferral to give you more time to get ready.

ASIC Focus Areas for 2022 Reporting

As COVID-19 begins to lose its place in the public consciousness, the uncertainty felt during the pandemic has been replaced by the economic challenges presented by high inflation, an increase in energy costs and higher interest rates. ASIC has reminded directors and preparers of financial statements for the year ended 30 June 2022 to review and be aware of the impact of these uncertainties.

For the 30 June 2022 reporting period, ASIC will be focusing on areas of concern. One of these is uncertainties and risks which may affect asset values, liabilities, and assessments of solvency and going concern. This includes factors such as COVID-19 conditions and restrictions during the period, the discontinuation of financial and other support from governments/parent companies/lenders etc., and the impact of rising interest rates on future cash flows and on discount rates used in valuing assets and liabilities.

Other considerations also include the increased likelihood of ongoing geopolitical risks, such as the Ukraine/Russia conflict and the flow-on effects for the broader Australian economy and the industry the business is in. This is compounded by the difficulty in obtaining sufficiently skilled staff and expertise due to the slow ramping up of migration activity after COVID-19.

It is perhaps no surprise then that ASIC considers industries that may be particularly affected this year to include the construction industry, owners of commercial properties and large carbon emitters.

Flowing on from these uncertainties, one of the other important areas that ASIC will be focusing on will be asset values, which encompasses the following:

  • impairment of non-financial assets – including goodwill, indefinite useful life intangible assets and intangible assets not yet available for use. The appropriateness of key assumptions and disclosure of estimation of uncertainties will need to be reviewed and justified.
  • value of property assets – factors that could adversely affect commercial and residential property values should be considered, including levels of migration, changes in shopping habits and future economic or industry impacts on tenants.
  • expected credit losses on loans and receivables – key assumptions used in determining expected credit losses should be reasonable and supportable.
  • value of other assets – including the value of investments in unlisted entities, whether deferred tax assets will be realised, and the net realisable value of inventories.

According to ASIC, financial report preparers and directors should also pay close attention to disclosures. It notes that when considering what information should be provided in the financial report, those responsible should consider what their backers and potential investors would want to know. Salient changes from the prior year should also be disclosed.

Given the challenging economic conditions, the adequacy of provisions for such things as onerous contracts, leased property make good, financial guarantees and restructuring need to be carefully considered. In addition, subsequent events after the reporting period which may affect assets, liabilities, income, expenses or disclosures also need to be reviewed and disclosed.

While companies may experience differences depending on their industry, where they operate and how their suppliers and customers are affected, what remains consistent is that all companies will face some level of uncertainty about future economic and market conditions. ASIC encourages companies to ensure that impacts on the business are appropriately disclosed, and that underlying estimates and assessments for financial reporting purposes be reasonable and supportable.  

Need help preparing your financial statement?

With the end of financial year drawing closer, we can assist in preparing financial statements and ensuring that all estimates and assessments are reasonable. Contact us today for help and advice.

Rising interest rates: what Australian SMEs need to know

Key Points:

  • The RBA expects underlying inflation to rise to 4.75 per cent, while the Consumer Price Index (CPI) has already risen to 5.1 per cent annually
  • Most small businesses have outstanding loans in one form or another, and an increase in interest rates will essentially result in more expensive loan repayments for them

The world has changed a lot since the global financial crisis of 2008, but one thing has remained constant: record low interest rates. No matter what turbulence they faced, Australian businesses could rely on the fact that borrowing remained cheap.

Now, we are finally coming to the end of the cheap lending cycle. Inflation is rising globally, spurred by pandemic-induced supply chain shortages, rising commodity prices, including oil and gas, thanks to Russia’s recent invasion of Ukraine.

In the US, inflation hit 7.9 per cent in March, causing the Federal Reserve to raise rates for the first time since 2018. This has, rightly, put Aussie businesses on notice to expect a rise in interest rates, with Commonwealth Bank already tipping that cash rates will increase in June.

While Australia is far behind the US on inflation, pressure will likely increase. The RBA expects underlying inflation to rise to 4.75 per cent, while the Consumer Price Index (CPI) has already risen to 5.1 per cent annually. Just this week the RBA has increased the cash rate target by 25 basis points, which was swiftly passed on by the major banks, despite there being some abnormal economic factors caused by COVID over the last two years.

But what does all this mean for small businesses? Many business owners, particularly those running high-growth, eCommerce companies, will be focused on supply chain issues that will negatively impact their ability to secure stock, which in turn will restrict their cashflow. The rising interest rate environment is only going to further impact on a business’s freedom to operate.

The end of cheap money

Until this point, businesses have enjoyed record low borrowing rates from traditional banks due to the all-time low cash rate and fierce competition from non-bank lenders, enabling them to fund their growth cheaply.

This has meant it has often been considered ‘best practice’ to borrow to fund growth. Most small businesses, therefore, have outstanding loans in one form or another, and an increase in interest rates will essentially result in more expensive loan repayments for them. Since these are often long-term debts that will take years to repay, this will mean carrying the debt for longer, incurring more interest.

For those businesses looking to obtain shorter-term funding to invest in growth or cover them until more cash arrives, this funding will become more expensive. Banks and other lenders that require physical assets to secure finance to, will likely set more stringent terms. As any business owner who has taken out a bank loan knows, the prospect of losing your house because you can’t make payments really ups the pressure.

Borrowing to stay ahead

The issue is that, now more than ever, businesses need to have cash to get ahead. Competition in the supply chain is fierce, with suppliers, particularly those in Asia, able to select which buyers they want to sell to. Australian businesses are also facing record high container prices, with shipping operators preferring to focus on larger markets, such as the US.

All this means that Australian businesses may not be getting the best terms from suppliers, meaning that stock is slower to arrive, and margins are cut (or costs are passed onto customers).

Companies that have emerged cashflow-positive from the pandemic are in an excellent position to get ahead of competitors by buying stock more quickly and in greater volume from suppliers, in order to secure themselves better rates and more immediate availability. But those companies that can’t fund this may fall behind.

Finance, for supply chains

There are a range of so-called ‘non-bank lending’ products out there which businesses can turn to that will be much more flexible to the needs of smaller, high-growth businesses across a range of industries.

Many non-bank lenders won’t require a business to specify a physical asset to secure lending to, making them more suitable for eCommerce or other similar businesses. Plus, funding types such as Debtor Finance (sometimes known as invoice finance) mean that companies can receive cash from unpaid invoices early, without waiting for the usual 30, 60 or 90 days to pass. An innovative supply chain financier, such as Octet, can provide the facility for this, and will take a small fee, but ultimately that funding is still yours from your own sales, and, therefore, is less prone to interest rate rises.

Take advantage of any available early payment discounts, whilst receiving your goods quicker than the competition. The next few years are going to be uncertain and challenging, but savvy businesses shouldn’t settle for high-interest bank funding to see them through, without at least considering the alternatives. For more information, book a consultation with us today.

Disclaimer: The content of this summary is general by nature. We therefore accept no responsibility to persons acting on the information herein without consulting with DSV Partners. Liability limited by a scheme approved under Professional Standards Legislation.

How to take advantage of the Government’s digitalisation incentives this financial year

Key Points:

  • $1 billion is being provided to support small businesses digitalise their operations with a new bonus tax deduction
  • For every $100 a business spends on digital economy technologies, they get a $120 tax deduction

As part of the Australian Government’s Digital Economy Strategy, $1 billion is being provided to support small businesses digitalise their operations with a new bonus tax deduction. 

SMEs with an aggregated turnover below $50 million per annum will be able to deduct an additional 20 per cent of the cost incurred on business expenses and depreciating assets that support their digitalisation. So, for every $100 a business spends on digital economy technologies such as flexible work solutions, cyber security, cloud adoption, e-commerce, or new software services, they get a $120 tax deduction.

This is a huge win for SMEs as it will help fund their digital transformation for the future. And yet most business owners are unaware of the current digitalisation incentives, whether it applies to them or how they can benefit. As the tax incentive is only available until 30 June 2023, it is simply a wasted opportunity to not capitalise on the investment boost being offered. It’s time to do your research and analysis, identify the areas within your business that would benefit from digitalisation, prioritise those needs and choose the right partners to leverage.

Senior leadership involvement in software purchasing was up 7 per cent since the start of the pandemic, and over the last two years, demands have caused IT budgets to skyrocket. Yet these budget increases cannot continue, so one critical solution is for SMEs to focus on optimising their tech stack. The question is, how do you get started?

1. Conduct a full business evaluation and digital audit

Analyse all pillars of your business to work out what can be done more efficiently and effectively and how can technology be the enabler. Assess the tech stack you already have and see if there’re ways to consolidate and optimise for performance.  Based on the known gap, research the digital tools, platforms, or solutions that will complement and enhance your current tech stack and enable you to increase productivity, profitability, and assist in improving the way of working for the future.

2. Prioritise your digital requirements

In Frost & Sullivan’s research, the top five selection criteria for businesses choosing a new IT solution were:

  • supporting IT processes automation 28 per cent
  • improving employee productivity 25 per cent
  • ensuring performance & reliability 25 per cent
  • value for money 23 per cent
  • improving IT administration/management 22 per cent.

The research also found that one of the most important digital solutions to invest in, is one which ensures the business can successfully run from anywhere. Yet SMBs are often lacking in a simple, reliable and scalable solution for the hybrid and remote working world in which we now live in and is here to stay.

3. Do your research

Decide which provider is the right fit for your business now and in the future. Conduct online research, talk to peers, and seek out expert advice to identify a shortlist of providers. Choose a solution that is suitable and cost effective for SMEs, yet with the capability and capacity to grow as the business scales, with on-demand support as and when required. For example, GoTo provides flexible work software that enables businesses to achieve a sustainable, resilient, and future-proof work-from-anywhere strategy. Significantly, it provides enterprise-grade technology specifically designed for SMEs, combining unified communications and collaboration as well as IT management and support solutions in one affordable application that can scale to facilitate future growth.

4. Invest

Don’t wait. The market is constantly transforming, and you don’t want to be left behind. The bonus deduction applies for qualifying expenditures up to $100,000 per annum incurred between 29 March 2022 until 30 June 2023. Consult us for advice on how to maximise this tax incentive today.

Disclaimer: The content of this summary is general by nature. We therefore accept no responsibility to persons acting on the information herein without consulting with DSV Partners. Liability limited by a scheme approved under Professional Standards Legislation.

More ATO Action on Super Guarantee Non-compliance

The Australian National Audit Office (ANAO) has recently issued a report on the results of an audit conducted on the effectiveness of ATO activities in addressing super guarantee (SG) non-compliance. While ANAO notes that the SG system operates largely without regulatory intervention as employers make contributions directly to super funds or through clearing houses, the ATO does have a role as the regulator to encourage voluntary compliance and enforce penalties for non-compliance.

To measure this non-compliance, the ATO uses a measure called the SG gap, which is an estimate of the difference between the amount the ATO collects and what would have been collected if every taxpayer was fully compliant. The most recent data from the ATO was published in 2021 and indicated that the net SG gap in 2018-19 was around $2.5bn.

Overall, the ANAO report found that ATO activities addressing super guarantee non-compliance were only partly effective. This also held true for the risk-based SG compliance framework in which the ATO operates. It noted that while there was some evidence that the ATO’s compliance activities were improving employer compliance, the extent of improvement could not be reliably assessed.

The report made three recommendations to improve ATO compliance activities in relation to SG non-compliance. The first was that the ATO implement a preventative approach to SG compliance. The second was that the ATO assess its performance measures against the Public Governance Performance and Accountability Rule 2014 and enhance its public SG performance information. This includes setting targets for measures such as the SG gap and having explanations for performance results, as well as changes over time.

While the first two recommendations will have a negligible practical impact on day-to-day operations for employers in general, ANAO’s third and final recommendation may be a different story. Among other things, ANAO recommended that the ATO maximise the benefit to employee’s super funds by making more use of its enforcement and debt recovery powers, and to consider the merit of incorporating debtors holding the majority of debt into prioritisation of debt recovery actions.

In its reply, the ATO agreed with this recommendation and stated that while it paused much of its firmer super guarantee related recovery actions through the COVID-19 pandemic, those have now recommenced. With the recommencement of recovery actions, its focus will generally be on taxpayers with higher debts, although it will be prioritising taxpayers with super guarantee debts irrespective of value.

The ATO also agreed with the first two recommendations in whole or part. It says that it has already begun implementing a preventative compliance strategy using data sources such as Single Touch Payroll and regular reporting from super funds. It expects to continuing prioritising a preventative approach while also strengthening its data capability.

In addition, the ATO have indicated that they will continue to investigate every complaint received in relation to the non-payment of SG, taking action where non-payment is identified. These actions include the imposition of tax and super penalties, as well as the recovery and back payment of super to employees. In addition, it will be increasing transparency of compliance activities and employer payment plans so that affected employees are aware of the expected timing of back payments of super.

Need help with SG payments?

Employers should take note that the ATO is now back to its pre-COVID-19 setting in relation to late or unpaid SG. If you have issues with paying super guarantee or would like to make a voluntary disclosure before a potential ATO audit, we have the expertise to help. Contact us today.

Disclaimer: The content of this summary is general by nature. We therefore accept no responsibility to persons acting on the information herein without consulting with DSV Partners. Liability limited by a scheme approved under Professional Standards Legislation.

Employees vs. Contractors: More Clarity Coming

The High Court recently handed down a significant decision dealing with the distinction between employees and independent contractors. The case concerned an “independent contractor” and a labour hire company. Although the ATO was not a party to either case, it has since released a decision impact statement as the High Court’s decisions impact on the ordinary meaning of the term “employee”.

In the case, a labourer had signed an Administrative Services Agreement (ASA) with a labour hire company to work as a “self-employed contractor” on various construction sites. The Full Court had initially held that the labourer was an independent contractor after applying a “multifactorial” approach by reference to the terms of the ASA, among other things. The High Court however, overturned the Full Federal Court’s decision and held that the labourer was an employee of the labour hire company.

The majority of the High Court stated that where the parties have comprehensively committed to the terms of the relationship to a written contract, and no party is disputing the validity of that contract, the characterisation must proceed based on the legal rights and responsibilities established in that written contract. It thus concluded that a multifactorial approach examining the relationship between the parties over the entire history of their dealings was unnecessary and inappropriate. In certain circumstances however, an examination of post-contractual conduct may be permissible, such as when the contract is not in writing, is oral/partly oral, being challenged or varied.

The minority view of two of the Judges considered the multifactorial test to be a well-established principle for characterising the totality of the legal relationship and that they were permitted to look at the whole employment relationship and not be restricted to the written contract. Even though there were different approaches taken in the judgement, the High Court agreed that the critical question in these circumstances was whether the supposed employee performed work while working in the business of the engaging entity.

“That is, whether the worker performed their work in the engaging entity’s business (i.e. the labour hire firm) or in an enterprise or business of their own.”

In its decision impact statement, the ATO noted that the High Court has not disturbed the well-established practice of examining the totality of the relationship. While the multifactorial test was rejected by a majority, there are still instances where it could be applied

In addition, the ATO noted that the decision recognised that long-established employment indicia are still relevant, although they must now be viewed through the focusing question of whether the supposed employee is working in the business of the employer. This, according to the ATO, reflects its current understanding of the application of the business integration test that the High Court has now elevated as one of the primary aspects of contractual examination.

As a result of the decision, the ATO will review relevant rulings that may be impacted by the High Court’s decision in the case, including super guarantee rulings on work arranged by intermediaries and who is an employee, as well as income tax rulings in the areas of PAYG withholding and the identification of employer for tax treaties.

Need help?

If you run a business and have dealings with contractors, we can help you understand how this decision will affect you. If you would like to keep up to date with any developments or changes to ATO’s rulings impacted by the High Court’s decision, contact our office today.

Disclaimer: The content of this summary is general by nature. We therefore accept no responsibility to persons acting on the information herein without consulting with DSV Partners. Liability limited by a scheme approved under Professional Standards Legislation.

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