2nd Quarter 2013

From 1 July 2012, there will be new reporting requirements to the ATO for business owners that operate in the building and construction industry. Business owners will need to report the total payments they make to each contractor for building and construction services. The details to report will generally be contained in the invoices businesses receive from their contractors.

Businesses need to report if all of the following apply:

• they are in the building and construction industry;
• they make payments to contractors for building and construction services; and
• they have an ABN.

The first Taxable payments annual report is due 21 July 2013 for payments made in the 2012–2013 financial year. In this first year, businesses that lodge their activity statement quarterly, may lodge by 28 July 2013.

Business owners will need to prepare now to ensure they can meet their reporting requirements for the 2012-2013 financial year. You will need to ensure that your systems are prepared to begin capturing this information from 1 July 2012.

You can download and print a blank worksheet that may help you to complete the Taxable payments annual report from www.ato.gov.au/taxablepaymentsreporting. This website provides all the information you need. Appendix 1 provides examples of building and construction services.

NEW GOVERNMENT SUPER PAYMENT FOR LOW INCOME EARNERS

A new government super payment, called the low income super contribution (LISC), started on 1 July 2012. It will help eligible low income earners save for their retirement.

LISC is for people who have an adjusted taxable income of $37,000 or less per year. People who are eligible for LISC will get a government super payment that is 15% of their concessional contributions, which includes super payments that an employer makes on a person's behalf from their before-tax income. The maximum payment will be $500.

The Australian Taxation Office (ATO) will work out your eligibility using information on your tax return or, if you don't lodge a tax return, using other information that they collect.

If you lodge an income tax return, you will receive your LISC in your super account when the ATO has processed your income tax return and received information from your super fund about your super contributions. If you do not lodge an income tax return, the ATO will work out your eligibility using contributions information from your super fund along with other information they collect.

As the ATO will pay the LISC directly into your super fund, you need to make sure your super fund has your tax file number, as they cannot send your LISC to a fund that does not have your tax file number. Your super fund will let you know on your account statement that you have received your LISC. It may take up to 14 months from the end of the financial year for you to receive your payment.

You can apply to have your LISC paid directly to you if either of the following apply:

• you have reached the 'preservation age' (currently 55 years old) and are retired;
• you are 65 years old or over (even if you haven't retired).

SUPERANNUATION CONCESSIONAL CONTRIBUTIONS CAP

From 1 July 2012, the concessional contributions cap for superannuation has reduced to $25,000 for everyone, regardless of their age. The change is due to:

• the transitional concessional contributions cap for individuals aged 50 years and over expiring on 1 July 2012; and
• a proposed new policy that will allow people aged 50 and over with low account balances to make concessional contributions up to $50,000 per year without incurring excess contributions tax, being deferred for two years until 1 July 2014.

Recent legislative changes have expanded the Director Penalty Notice (DPN) regime to include superannuation guarantee contributions (SGC).

A director can incur a director penalty equal to the company SGC liability even where the liability is not reported. The liability is a parallel liability for the company and the director themselves. As one component of the SGC is an interest component, the liability can grow quickly.

This change will allow the ATO to garnishee the director's personal bank accounts. Recovery of the penalty can only occur 21 days after the issue of the DPN. Any monies recovered are applied to the benefit of the employee. The DPN may be issued to the director's residential address or to their registered tax agent.

There are also new lockdown measures which seek to address the problem of directors who know that the company is failing to pay liabilities but are content to take no action until the DPN issues, knowing that they could put the company into voluntary administration or liquidation and avoid personal liability.

The lockdown measure removes the director's right of remission from three months after the penalty is incurred unless the company liability is reported to the ATO within three months of when it should have been reported. Failure to report will mean that the liability can't be removed unless the debt is paid.

The measure is not retrospective but does impact any penalties already incurred. There is no excuse if the company doesn't have the money to pay the liability, however there are some defences which include:

• the director didn't manage the company due to illness etc;

• the director took all reasonable steps to get the company to pay the liability;

• directors can ask the Commissioner to consider their defence even where there are no legal proceedings on foot;

• the director formed the reasonable belief that the employees were merely contractors.

From 30 June 2012, a new measure was introduced to address the so called pay as you go withholding (PAYGW) non-compliance tax. In some cases, directors were asserting the company had failed to pay their withholding to the ATO whilst claiming a refund of their instalments. This new measure will stop these claims being made. The provision could potentially apply to associates of the directors.

WORKING OUT IF THE INCOME YOUR BUSINESS RECEIVES IS PERSONAL SERVICES INCOME (PSI).

Many consultants and contractors operate their business through a company, partnership or trust. In many cases, the income received for the work they do may be classified as PSI. If you are an employee only earning salary and wages (that is, working for an employer and not under an ABN), do not read any further. This information does not apply to you.

Personal services income (PSI) is income that is mainly (more than 50%) a reward for the skills, knowledge, expertise or efforts of the individuals who performed the services. A personal services entity is a company, partnership or trust whose income includes the personal services income of one or more individuals.

To know if your business is receiving PSI, you will need to look at the income (or reward) from each contract you complete, and work out what percentage of the payment is for:

• the skills, knowledge, expertise or efforts of those who performed the services – that is, the labour component
• the materials supplied and/or tools and equipment used to complete the job.

If you work out that:

• more than 50% of the income you received is for the skills, knowledge, expertise or efforts of the individuals who performed the services, then the income for that contract is PSI
• 50% or less of the income received is for the skills, knowledge, expertise or efforts of the individuals who performed the services, then the income for that contract is not PSI.

Your business income can be a mixture of PSI and other income (non-PSI). So, it is important to look at the income you received from each separate contract to work out whether it is PSI. The terms and conditions of the contract as well as invoices and written agreements (which show the arrangement you have for the work) are important in working out whether the income is PSI or not.

You can receive PSI by performing services in any industry or occupation. This includes income:

• of a professional practising on their own account without assistance – for example, a medical practitioner in a sole practice
• payable under a contract where the labour or services of a person make up more than 50% of the value, for example, contractors in the building, IT and transport industry
• of a professional sports person or entertainer from the exercise of their professional skills (this does not include income from endorsements)
• of consultants, for example, computer consultants or engineers from the exercise of personal expertise
• of a commission agent who contracts with a supplier to sell goods on their behalf.

PSI rules only apply to PSI. If your business receives PSI, then certain rules (known as the PSI rules) may apply where:

• your business cannot claim certain deductions against the PSI.
• the PSI (less relevant deductions) your business received will need to be attributed (treated as belonging) to each individual who performed the services – that is, the profits can’t be retained in the business
• your business needs to meet certain tax return obligations
• your business may have additional pay as you go (PAYG) withholding obligations.

To work out if the PSI rules apply, your business needs to work through a series of tests:

• results test – use this test first to work out if you’ve received the income after achieving a specific result or outcome
• unrelated clients test – use this test to work out if you have received the income from two or more clients who are not connected or related
• employment test – use this test to work out if others were employed or contracted to help complete the work that generates the PSI
• business premises test – use this test to work out if the location and usage of your business premises meet certain criteria.

If you do not pass the results test, you need to apply an additional rule, called the 80% rule, to work out if 80% or more of your income comes from one client.

Attached is a step by step flowchart that shows you how to work out if the PSI rules apply to the PSI your business receives. PSI rules apply when you have not passed any of the tests and you do not have a determination from the ATO.

Download this document

If the PSI rules apply, this means you (company, partnership or trust):

• won’t be able to claim certain deductions against the PSI
• need to meet certain tax return obligations
• need to attribute (treat as belonging) the income to the individuals who performed the services (that is, you can’t retain the profits within the business)
• may have additional pay as you go withholding obligations.

If you need further assistance or would like to discuss any of the above please do not hesitate to contact us.