The ATO's recently released Compliance Program 2012-2013 provides an overview of the issues the ATO will be focusing on for micro to medium sized employers over the next year.

A key focus area is sham contracting arrangements. This issue is particularly topical given a number of recent decisions involving the vexed issue of whether independent contractors are genuinely contracting on their own behalf or whether they are employees at common law.

In Working Paper Issue 9, we provided an update on ACE Insurance Ltd v Trifunovski [2011] FCA 1204 where the Federal Court ruled that five former insurance sales representatives were employees, not independent contractors. The Federal Court has subsequently ordered penalties and approximately $500,000 in damages against Ace Insurance, including an award of $333,130 for annual and long service leave entitlements for the highest paid agent who had been with the company for seven years.

What is happening?

The ATO has announced it will increase scrutiny on compliance with:

  • employer obligations in micro enterprises;
  • fringe benefits tax (FBT) rules in SMEs; and
  • superannuation guarantee obligations.

The ATO intends on auditing industries and employers and those with a high-risk of non-compliance with their superannuation guarantee obligations. In particular, the ATO will be focusing its compliance activities on employers running cafes and restaurants, real estate businesses and carpentry businesses in home building or construction.

Employer obligations

For employers running micro enterprises, the ATO's compliance activities will focus on employer obligations in relation to the correct treatment and disclosure of salary and wage payments.

The ATO is pledging to review the tax affairs of more than 20,000 businesses to ensure that the correct amounts of PAYG withholding are reported. Further, the ATO will use intelligence and information matching to detect cases of non-compliance and follow this up with reviews and audits where necessary.

As mentioned earlier, the ATO also intends continuing its crack down on employers who try to avoid their tax and superannuation responsibilities by engaging sham contractors rather than employees, even though, legally, these workers are their employees. The ATO is concerned that such practices mean that workers who should be classified as employees are missing out on entitlements, such as superannuation. The ATO is also concerned that these arrangements are facilitating the 'non-reporting of income by unscrupulous contractors'.

Fringe benefits tax

For SME employers, the Compliance Program includes a focus on compliance with the FBT regime.

In particular, the ATO intends to take action against SME employers who:

  • fail to lodge returns when required;
  • fail to identify and correctly treat fringe benefits; and
  • incorrectly apply valuation, exemption and reductions rules.

The ATO intends on conducting approximately 200 reviews and audits and has stated that it will be taking firmer action against employers who choose not to comply with their FBT obligations.

Tips for employers

  • Employers should conduct their own audit regarding the status of any contractors, and consider whether those persons should instead be engaged as employees.
  • Employers should seek tax advice regarding their FBT obligations and ensure that they are meeting those obligations.
  • If audited by the ATO, employers should cooperate with the ATO but should also seek advice about how best to respond to ATO enquiries and the grounds on which they can refuse to produce information.
  • Employers can refuse to hand over legally privileged documents, but should ensure that they deal with and store such documents in a way that does not waive that privilege.


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