If you’re in the construction game, then you need to know that the ATO now has data matching capabilities. What does this mean? Well, data matching is a powerful administrative and law enforcement tool used by the ATO to electronically compile, validate and compare information from a variety of third-party sources, including tax returns and reports from businesses and individual contractors.
In July 2012, to assist with data matching between businesses and their contractors, the ATO introduced taxable payments reporting for businesses in the building and construction industry. This reporting requirement applies to business who:
- Make payments to contractors for building and construction services
- Have an Australian Business Number (ABN)
Businesses are required to report annually to the ATO any payments made to contractors, and the associated GST.
How ATO Data Matching Affects Contractors
If you’re a contractor in receipt of income, you’ll need to be extra mindful when processing your income tax return. Be sure to declare all receipts, as any information regarding your income declared in your employers’ Taxable Payments Report is accessible by the ATO.
ATO Data Matching and Cash Income
The building and construction industry is well known for having many cash transactions. The ATO is working to ensure that all taxpayers are paying the correct amount of tax for the income received, regardless of what form they receive their income.
A Recent Case Study
Our team processed two years of tax returns for a new client – let’s call him “Sean”. Sean works in the building and construction industry as a contractor. The returns were prepared based on the information Sean provided. The income reported appeared relatively low for a family to live on, however Sean confirmed that this was all the income he had received. Sean calculated his income based on the deposits he had in his business bank account, adding up all the income for each of the two financial years.
What Sean didn’t provide us with was details of the cash income he had been receiving from another building company he had been contracted to work for. Because Sean had not made us aware of this cash income, it was not reported in either of his two tax returns.
About nine months after the lodgement of his tax returns, the ATO sent a letter to Sean with the heading “review of payments you received in the building and construction industry”.
The ATO had received information from the company that had paid Sean in cash. This company claimed a tax deduction for the cash payments made to him as a contractor and reported the payments on the company’s Taxable Payments Annual Report.
Even though Sean was paid in cash, he was required to report the cash income to the ATO in his tax returns.
The outcome was that one return was adjusted to include approximately $25,000 additional income, and the other return was adjusted to include approximately $30,000 additional income. This resulted in a large tax liability which Sean was not expecting.
Sean’s lesson here is that, should he fail to declare all the cash income received via contracting for building and construction businesses, the tax department is likely to find out via data matching through Taxable Payments Annual Reporting.
Why You Must Lodge a Taxable Payments Annual Report
As a business operating in the building and construction industry, you are obliged to lodge your Taxable Payments Annual Report by the due date of 28 August. Otherwise, the ATO can charge late lodgement penalties.
From 1 July 2017, the late lodgement penalty for a small business is as high as $1,050. Medium and large businesses can expect significantly higher penalty rates.
For more information regarding taxable payments annual reporting, see: https://www.ato.gov.au/business/reports-and-returns/taxable-payments-annual-report/businesses-in-building-and-construction/work-out-if-you-need-to-report/