The Inspector-General of Taxation (IGT), Ali Noroozi, has released his report into the Australian Taxation Office’s (ATO) employer obligations compliance activities. While the review process initially arose from concerns about the uncertainty surrounding the employee/contractor distinction, the IGT ultimately treated the Report as an opportunity to conduct a comprehensive review of ATO compliance activities in respect of employer obligations.
The Report, which was handed to the Government on 2 December 2016 and released to the public on 24 May 2017, also reviews changes implemented by the ATO following the Commonwealth Government’s policy on reducing red tape for small businesses and identifies further opportunities for reducing compliance burden and costs of employers.
The Report makes 11 recommendations. Two were directed to the Government, and 9 to the ATO, who has responded by agreeing in full or in part to 7 of the 9 recommendations. Collectively, the recommendations address 3 broad areas of concern:
- Uncertainty associated with the employee/contractor distinction: The Report recognises the challenges employers face in determining whether a worker is an employee or a contractor, acknowledging difficulties in applying the “inherently ambiguous” common law definition of ‘employee’, which is also altered by tax and superannuation legislation. Due to high costs, businesses may seek limited, incomplete or no professional advice at all, despite risks that significant liabilities may be applied where the ATO retrospectively reclassifies the worker’s status.
The IGT recommends that the ATO clarify the protection from penalties afforded to employers who use and rely on the Employee/Contractor Decision tool (ECD tool) in good faith to determine the status of workers. It was also recommended that the ECD tool be extended for use by workers and information outlining employer/employee rights and obligations be provided when using the ECD tool. A further recommendation that a voluntary certification service be implemented, which would offer binding advice on the status of workers to both employers and workers (private binding rulings are currently available to employers only), has been rejected by the ATO.
- Cost of complying with employer obligations: The Report queries the effectiveness of various initiatives introduced by the Government that are intended to reduce compliance burden on businesses. Discussion focused on the Small Business Superannuation Clearing House, Taxable Payments Reporting System and the planned introduction of the Single Touch Payroll (STP) system (adoption is mandatory for large employers and voluntary for small employers). Several changes were proposed to ensure that these initiatives streamline reporting processes for businesses as intended.
The Report also recommends that the Government conduct a review of the Fringe Benefits Tax (FBT) regime, recognising that issues with the FBT system raised by stakeholders — such as the utility of the regime as an integrity measure and high compliance costs on employers — can only be addressed by a wholesale review of the system and legislative change. The Government says it will consider this recommendation, but does not commit to any specific review process.
- ATO’s approach to monitoring non-compliance: The Report makes various recommendations intended to enhance the ATO’s compliance capabilities. One area of concern is the ATO’s reliance on reporting by affected employees to identify cases of non-compliance with regard to superannuation guarantee (SG) payments. The Report concludes that the ATO should take a more proactive compliance approach, since affected employees are often unaware when underpayment has occurred.
In addition to the ATO’s intention to use real time data collected from the STP system to detect PAYG withholding and SG non-compliance (once the system is rolled out), the IGT proposes increasing the use of data from third party sources, such as superannuation funds, State revenue offices and the Fair Work Ombudsman.
Recent observations made by the Senate Economics References Committee echoed this concern. For further details, see our Riposte on the Committee’s report, Superbad – Wage theft and non-compliance of the Superannuation Guarantee.
Jessica Voong, Graduate at Greenwoods & Herbert Smith Freehills, is a co-author of this article.