Employment taxes present a uniquely interlocking web of State and Federal obligations, that continue to present increasing challenges. At the same time, it is becoming increasingly more difficult to resolve complex issues, whether with the tax authorities or through legislative change, where required. In addition to these challenges, we are also simultaneously on the cusp of a growing digital tax administration era that is already shaping future employment tax compliance strategies. This article explores some of the challenges ahead.

 


 

Current fringe benefits tax (FBT) and employment tax challenges is the subject of the TaxVine #41 (29.10.21) update by the Tax Institute’s Tax Institute’s National FBT and Employment Taxes Technical Committee: Chair Paull Ellis CTA and Deputy Chair: Greg Kent. They provide an update, together with their insights.

Current employment tax challenges

Taking a proactive approach in identifying key trends and issues and recommending improvements to the employment tax and superannuation systems is an important focus of the Institute’s National FBT and Employment Taxes Technical Committee (Committee).

Employment taxes present a uniquely interlocking web of State and Federal obligations, that continue to present increasing challenges. At the same time, it is becoming increasingly more difficult to resolve complex issues, whether with the tax authorities or through legislative change, where required. In addition to these challenges, we are also simultaneously on the cusp of a growing digital tax administration era that is already shaping future employment tax compliance strategies.

Single Touch Payroll Phase 2

Single Touch Payroll (STP) Phase 2 is coming and, with it, increased real time reach of the Australian Taxation Office (ATO) into payroll data. Payroll risk continues to be a major governance issue, and with the ATO increasingly becoming the hub of all employment information, not only tax-related, STP Phase 2 needs to be approached with this big picture in mind. Potential application of the Director Penalty regime and significant global entities (SGE) penalties means it is vital for company boards to have visibility of the implementation process and to identify any payroll data irregularities before they are reported through to the ATO on a real time basis.

While the initially proposed implementation date of 1 July 2021 has been pushed back progressively to 1 January 2022 — and the ATO will treat employers as having met this deadline if they start reporting through STP Phase 2 before 1 March 2022 — the implementation time is still short. Payroll reporting requirements under STP Phase 2 will be significantly expanded to support enhanced sharing of information between the ATO and other government agencies, including Services Australia. A new ‘disaggregation of gross’ approach will mean that much greater detail will need to be reported on various salary and wage items not previously within the scope of STP.

Items that will be reported in detail for the first time include leave, overtime, bonuses and commissions, various detailed allowance categories, directors’ fees, salary sacrifice and a number of withholding items. Anything not covered by one of the new detailed categories falls within ‘gross’. There are also a number of new non-payment disclosures, including country code reporting, with a lot more emphasis on placing employees into categories that help define their tax treatment. These changes will require significant planning and testing.

Payroll tax issues

1. Wage/superannuation underpayments

Still on the payroll governance theme, wage underpayment issues continue to create headlines.

Not so well understood though are the potential payroll tax complications that flow from wage and/or superannuation underpayments. The State revenue authorities looking to make up for revenue shortfalls due to COVID-19 are looking more critically at this issue and, in many cases, asserting that payroll tax returns need to be amended to include the underpaid amounts in the years that the original shortfalls related to, rather than the year of remediation.

This results in considerably more complicated adjustments, as well as potentially higher penalty and interest charges. However, there has been a distinct lack of uniformity of approach with revenue authorities changing their approach over time, as well as there being variations between revenue authorities.

2. Broad application of relevant contract rules

Fresh off the success of the Optical Superstore case decision, the State revenue authorities appear to be looking to expand the payroll tax net to catch other industries that use a service model approach that incorporates the collection of cash on behalf of service providers. Watch this space, but it seems that the medical industry is not the only industry at risk of unexpected payroll tax obligations (see related TT article).

ATO taking a stricter approach to FBT interpretation

The last few months has seen the ATO finalise its approach to a number of long-standing issues that have previously been on this Committee’s radar. Sadly, there hasn’t been much good news for taxpayers, with some recently released FBT rulings perhaps missing an opportunity to better reflect business reality in the ATO’s interpretations.

For example, the long-awaited release of TR 2021/2 – Fringe Benefits Tax: car parking benefits, will see many more employers fall into the ‘FBT on car parking’ net from 1 April 2022, particularly those outside CBDs. Affected employers will need to start planning and budgeting for this new impost and should not underestimate the compliance burden to identify and assess car parking fringe benefits.

Similarly, the release of two long-awaited business travel rulings, TR 2021/1 and TR 2021/4, setting out the ATO’s revised views on when transport and other travel costs will satisfy the ‘otherwise deductible’ rule, seem to reflect a tightened approach by the ATO that will potentially result in employers being liable to pay FBT on travel costs that are clearly work-related in the ordinary sense. Employers who utilise fly-in fly-out (FIFO) workforces or supplement their workforces with short-term foreign based workers, will potentially be impacted.

It is also worth noting that the ATO recently flagged a perceived gap between actual FBT revenue collected and what it believes should be paid if all taxpayers were fully compliant. For 2018–19, the net FBT gap estimate was around $1.13 billion or 22.6%. It remains to be seen though whether this will result in increased compliance enforcement activity.

The pace of change

There is still another wave of legislative change coming with a rewrite of the personal tax residency rules, employee share scheme (ESS) reform, as well as continuing challenges to both the effectiveness of FBT (i.e. effort versus revenue collected). Further, there is the issue of the level of documentation that employers need to retain above and beyond normal business requirements.

At the same time, tax administrations around the world are increasingly embracing the digital world at a rapid pace, with Australia being no exception. Two common characteristics are readily identifiable. The first is the ever-increasing requirements for source data to be provided in digital form. In the Australian employment tax environment, STP is a key example that is being further built out as noted above, as well as the expanding electronic collection of contractor data. The second characteristic is the increasingly advanced use of data matching and data analytics.

Future employment tax strategies need to be driven by the increasing availability of real time data rather than by reaction to historical filings, as well as strategies to increase the automation and efficiency of compliance filings. The key lies both in developing a data strategy for proactive compliance that keeps taxpayers ahead of the revenue authorities as their data analytics becomes more sophisticated, as well as finding ways to utilise business knowledge to harness data and develop processes that are both more efficient and provide valuable business insights.

Paul Ellis, CTA – Associate Partner, Ernst & Young;  Greg Kent, CTA – Partner, PwC

[Tax Month – November 2021Previous 2021] 7.11.21

 

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