Tax and the building and construction industry

The building and construction industry makes a significant contribution to the Australian economy.
The industry:

accounts for around 6% of GDP*
has a level of activity that in June 2002 was measured at $51.8 billion*
employs over 700,000 people*
has only 1% of businesses that employ more than 20 employees and over 96% of businesses have a turnover of less than $2 million*, and
tax collected from the industry was approximately $9 billion in 2002-03 ^.
Source: * Royal Commission into the Building and Construction Industry, ^ ATO

Building and construction industry environment
The ATO has a continuing history of involvement with the building and construction industry. Compliance activities have revealed a high risk of non-compliance with tax obligations.

Environmental factors include:

extensive use of cash payments are common in the industry
labour costs are significant and are typically in the order of 15% to 25% of turnover. Arrangements designed to reduce the costs of labour and the associated costs are often used by businesses to increase their competitiveness
a trend to engage labour under service or results-based contracts rather than employment contracts. This is consistent with labour market trends more generally, but there is an ongoing need to ensure that contractor arrangements are genuine and that tax and superannuation obligations are being met, and
the highly competitive nature of the industry places considerable commercial pressure on businesses to minimise costs and non-payment of tax debts is seen by some in the industry as a means of remaining competitive.
Key risks we are addressing
Key risks in the large business segment are public trading trusts, property syndicates and issues relating to the trading stock provisions.

For the micro business segment ($2 million turnover or less) and small to medium enterprise segment (turnover between $2 million and $100 million) key risks include:

payment of cash wages which are not disclosed on payment summaries that are facilitated, for example, by the use of fabricated invoices to disguise cash wages as payments for materials or equipment
cash and other payments to contractors and sub-contractors which are not returned as income
fraudulent claims for GST credits
use of bogus labour hire arrangements (‘bodgies’) which generate cash in hand for employers and facilitate the payment of undisclosed cash to employees. These practices are often compounded by directors who generate payment summaries for employees to claim PAYG(W) credits on tax that has never been paid
phoenix arrangements used to evade payment of tax liabilities through deliberate and systematic liquidation of companies
poor record keeping leading to understated supplies and overstated acquisitions
failure to lodge Business activity statements
understated GST on property sales and the incorrect application of the margin scheme
overstated valuations resulting in an under-reporting of GST
incorrect classification of new commercial/residential apartments
incorrect classification of sales and expenses in Business activity statements
major infrastructure projects, and
employee/employer contractual relationships and trends.
Our compliance approach
In the early 1990s, audits of selected sub-industries commenced to gain a better understanding of the level of compliance across the industry. This work led to a series of projects to investigate areas such as the cash economy, the Prescribed Payments System, the Olympics Construction Project, phoenix companies and money laundering schemes operating through sham labour hire companies.

From early 2000 most of our field staff were involved in help and education activities supporting the introduction of the new tax system. The focus was to ensure people had the information they needed to meet their obligations. However, the ATO maintained a program dealing with evasion in the building and construction industry.

By the middle of 2002, two years into the new system, we shifted our focus to compliance and field staff began undertaking more visible verification and enforcement activities across all market segments.

In late 2002, we published our first Compliance Program setting out how we identify risks to revenue and the work the community could expect from us to combat these risks. We followed this up recently with the release of the Compliance Program 2003–2004. These documents make specific mention of the building and construction industry and the work we have done, and plan to do, to improve compliance.

The report of the Cash Economy Task Force, The Cash Economy under the New Tax System, and our response to it, released in September 2003, detail our continuing approach to handling cash economy issues.

Activities in the building and construction industry outlined in the report include:

800 visits to identify and quantify risks in the industry
2000 visits to companies with trading activities outside industry norms
400 visits to check GST treatment of display homes
monitoring of major infrastructure projects, and
a special focus on phoenix activities and other tax
Royal commission
The findings of the Royal Commission into the Building and Construction Industry have highlighted the need for a continuing relationship between the ATO and key players in the industry.

The Commission’s work identified tax issues and made recommendations in a variety of areas including:

combating tax evasion
controlling fraudulent phoenix activities (companies that fail and the business continues to trade in the industry through a new company, which does not accept the debts of the earlier company)
reviewing the exchange of information processes across agencies – federal, state and territory
defining key terms such as ‘employee’ and ‘wages’ across all jurisdictions
reviewing the impact of amendments to the Superannuation Guarantee legislation
reviewing the impact of the Alienation of Personal Services Income legislation
reviewing entitlement to ABNs, and
establishing a building and construction industry forum to discuss significant taxation issues across the entire industry.
The ATO gave evidence to the Royal Commission detailing our understanding of tax risks in the industry, information about our current and planned strategies and details of revenue raised from past activities.

We identified 160 tax-related issues arising out of the Commission’s work. An examination of these issues confirmed that 85% of them had been or were being dealt with by the ATO. The majority of the issues related to phoenix activity, fraud and evasion cases. Around $28 million in tax and penalties has been raised by the ATO from these cases.

Some of these cases were referred to the Director of Public Prosecutions (DPP) and the Australian Federal Police (AFP). In most cases, the taxpayers concerned have been prosecuted and some have received significant jail terms.

We have also followed up matters raised before the Commission where it was alleged that tax was at risk where it was subsequently found not to be the case. For example, it was alleged to the Commission that some illegal workers had tax deducted from their pay and that this tax was never remitted to the ATO. This was found to be incorrect.

Other matters identified by the Commission, which may lead to tax evasion being uncovered, are still under investigation.

We continue to liaise with the Interim Building Industry Taskforce to assist it in recognising potential breaches of tax law.

Some results
Between July 2002 and October 2003, we completed over 6600 enquiries, investigations and audits, and raised in excess of $240 million in tax and penalties.

We have enhanced our understanding of the industry and identified areas of concern. This has enabled us to apply better case selection techniques and address non-compliance more effectively. Our relationships with key players in the industry are much stronger than in the past. This has led to intelligence being shared across the federal and state agencies more regularly.

We have participated in raids on building sites with other agencies such as Centrelink and the Department of Immigration, Multicultural and Indigenous Affairs (DIMIA) to detect illegal workers being paid ‘off the books’.

We have also coordinated our visits to building sites with the Interim Building Industry Taskforce and DIMIA to better target areas of non-compliance.

As a result of enhanced liaison with the Australian Securities and Investments Commission (ASIC) we have improved the quality of information we hold about company directors and their associated entities. This has assisted us to more effectively identify phoenix companies.

In addition, the Proceeds of Crimes Act amendments, which took effect from January 2003, will assist in recovering assets stripped or hidden for illegal purposes.

Over the past five years almost $200 million in tax and penalties has been raised by the ATO by targeting phoenix practices of which almost $90 million has been collected.

Some employers are seeking to engage workers as sub-contractors, where the law is clear that they are employees. We are taking action to address this and other obvious breaches of the law and undertaking ongoing analysis of labour market trends to help shape our future strategies.

Where to now?
The ATO is committed to improving compliance in the building and construction industry and to working with industry to achieve this. One of the recommendations of the Royal Commission was that the ATO convene a building and construction forum to examine taxation issues of significance to the industry.

By involving industry participants including unions, employer organisations, businesses, individuals, and federal, state and territory stakeholders we hope to develop workable solutions to tax issues in this significant Australian industry.

Last Modified: Friday, 28 November 2003