ATO Targets Contractors Who Under-Report Income

The ATO has advised that it is using its Taxable Payments Reporting System (TPRS) to make sure more than $172 billion of payments to contractors have been properly declared.

According to ATO Assistant Commissioner Peter Holt, more than 158,000 businesses have now reported all payments made to contractors in the 2019–2020 year. The TPRS captures data about contractors who have performed services including couriering (including food delivery), cleaning, building and construction, road freight, information technology, security, investigation and surveillance services.

The ATO is now using this data to contact contractors or their tax agents to ensure that they have declared all of their income, including any from part-time work. The ATO is also checking the GST registration status and Australian Business Numbers (ABNs) of contractors that are businesses to ensure their relevant obligations are met.

In relation to individuals, the ATO is using sophisticated analytics to match the information provided by businesses in the taxable payments annual report (TPAR) to the figures provided on the tax returns of the individual contractors. The taxable payments annual report (TPAR) includes information such as the contractor’s ABN, name, address, and gross amount paid for the financial year. Where discrepancies between business reports and contractor returns are identified, the ATO will send the contractor a letter in the first instance.

For individuals who have inadvertently forgotten to include their income from contracting, an amendment can be lodged for the relevant tax return to correct the mistake. If you lodged your initial return through a tax agent, they are able to complete an amendment to the return on your behalf. If you lodged the return yourself, the easiest and quickest way to lodge an amendment is through myGov. Paper amendment forms can also be lodged, although that process will take longer – according to the ATO, it may take up to 50 business days for paper processing.

While it appears that the ATO will not initially apply any penalties in relation to the under-reporting of contracting income, and taxpayers will only need to pay any additional tax owed, it is likely that those taxpayers that do not respond to the initial ATO letter or lodge the required amendment may face penalties at a future date.

As a reminder, for false and misleading statements made on tax returns that are not reasonably arguable and result in a shortfall amount, the base penalty is 25% of the shortfall amount (for failure to take reasonable care) and penalties can go all the way up to 75% of the shortfall amount (for intentional disregard).

In addition to these penalties, the ATO has the option to apply a shortfall interest charge (SIC) in instances where a tax return is amended and the tax liability increases. The interest charge is updated every quarter, and is 3.01% for the current quarter (April to June 2021). This percentage is applied to the shortfall amount for the period between when the tax would have been due and when the assessment is corrected.

Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.