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  • Payroll, tax and superannuation: an important relationship

    PwC Payroll Managers Forum

    21 November 2019
    James O’Halloran, Deputy Commissioner,
    Superannuation and Employer Obligations, ATO

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    Introduction

    Thank you for the opportunity today to join you at this Payroll Managers Forum. I appreciate the invitation from PWC.

    The ATO has a range of roles across the super system and in engaging with employers and employees. For the administration of tax and super in Australia, the payroll sector has become central to many reforms in the past few years.

    The reason for our ongoing engagement with the payroll industry, and payroll managers across the business community, has been for a number of reasons, but mainly because it just makes good sense.

    If you think about how much has changed over the past five years with digital technology and how things have evolved, we can safely assume change will continue at a rapid pace. But more broadly, our operating environment continues to change.

    Like many of you today we are in the business of turning concepts into reality and the implementation of any major reform must not only be designed to be ‘fit for purpose’ but also ‘fit for the future’.

    As my observations today may reinforce, there’s never just one reform to deal with at a time. Major reforms programs come in ‘packages’ with many layers and many players and diverse expectations. However, such packages will always bring changes to many ‘business as usual’ processes and approaches.

    As importantly, reform packages always have new frameworks, with new objectives or emphases and of course with changed commitments and obligations. There’s often an overlap or convergence of multiple reform packages. A live example is the current intersection across super arising through the Single Touch Payroll (STP) program and the resultant transformation of pay-day reporting coupled with the allied changes to super guarantee (SG) reporting.

    In many ways, the investment in real time, or what’s often referred to as ‘event-based reporting’, has laid the foundation for greater trust and transparency in super and increasingly, adds to the visibility of the payroll system in its operation.

    As we speak, the Board of Taxation is considering some elements of the settings for fringe benefits tax and there are ongoing community discussions around the classification of workers. More broadly than tax matters, it's also evident that workplaces in general and employment relationships are also changing.

    These factors highlight the importance of having a shared understanding of the nature of the relationship between an employer and an employee. If this is not clear, there can be a range of misunderstandings and consequences.

    Of course the ongoing reform agenda has taught us all a lot. However the main trait I think is relevant to us all is to be open and ready for the reality of agreed or directed change and of course the opportunities they present.

    The business world is transforming and we’re also striving to design services and administrative arrangements that meet the needs of the community and government initiatives and recognise policy changes.

    Through such changes we seek to prevent the risk of any under or non-payment, debts and the risk of any legal or regulatory breaches.

    As with other industries who are moving to big data events, automating manual processes and merging with what may have been previously seen as unrelated data sets, we now have an opportunity to draw these together for greater evidence-based and more timely insights across super and payroll systems. Such an approach allows us all to make better decisions for the community.

    Of particular importance now is how agile and adaptive we are for the future requirements of the super and payroll system. With this in mind, I remain convinced that a common goal is to transform approaches and settings; not just to make the ‘old’ ways efficient but to also be 'fit for future purpose' for new and emerging needs.

    Our environment

    One thing you should all be thanked for is the part you’ve played to transform the visibility of the operation of the payroll system in Australia.

    This time last year, we’d just completed a challenging year on a range of fronts which took us all in new directions across the payroll industry and across super.

    In the past year, we’ve sought to support you through guidance and discussion. Of particular importance to us, was to ensure individuals and businesses understood the implications and longer term impacts of payroll system changes. This was especially so in terms of identifying any emerging consequences.

    There can be a tendency by us all to focus on ‘everything’ and not necessarily the ‘right things’. The most visible change is that we now have a super and payroll system with more visibility and therefore increased transparency and scrutiny for your companies, employers and of course oversight by the ATO.

    We have a lot in common

    So, today I want to cover a few areas we have in common. Like you perhaps, I often find we straddle a range of obligations and expectations that occur due to the relationship between employers and their workforce be they contractors or employees.

    The influence of employers cannot be understated. It is central to the correct application, reporting and payment of conditions and entitlements for employees.

    For many of you, if you don’t ‘get it right’ the consequences are dramatic, whether in terms of brand, reputation, risk, profit or investment.

    Indeed, changed obligations and reporting across super and payroll areas have now moved us all from a system based on annual reporting or reconciliation of transactional data, to a more real-time and shared data. We believe this is already providing us the ability to move increasingly away from ‘after the event’ reviews and audits.

    Through your efforts across STP, we’re seeing the rhythm and flow of the payroll system through every pay event - effectively as it happens. This helps us to get a level of assurance that things are working as intended but also assist us to set our risk tolerances so we can better identify when action is needed.

    Employers and employees

    For the ATO, the nature of the relationship between an employer and employees brings to the fore a number of tax and super obligations which do have consequences if people get them wrong.

    These matters include the importance of monitoring of employees' withholding tax arrangements (ie PAYGW), the application and reporting of FBT, the reporting and payment of SG and the categorisation of workers in terms of their employment status. It is important to also observe that all of these are essentially built around the relationship and interactions between an employer and their employee.

    In a tax and super sense, there’ve been a number of matters relating to employers and employees that have recently reaffirmed the Commissioner’s position

    On 13 November, we issued Taxation Ruling (TR 2019/D5) which updates our previous view on car parking fringe benefits and some aspects relating to commercial parking stations. We’ve invited public comments on the draft ruling, including any practical issues that might arise. The comments period is open until 17 January 2020.

    With respect to leave loading and the implications for SG, we have a longstanding ruling (Superannuation Guarantee Ruling SGR 2009/2) which provides our view that annual leave loading will be ordinary time earnings (OTE), unless there is evidence that it is demonstrably referable to a lost opportunity to work overtime.

    In the past year we’ve advised that for future quarters, we’ll be satisfied that the annual leave loading is demonstrably referable to a lost opportunity to work overtime where there is written evidence related to that entitlement.

    We’ve also recently published an ATO fact sheet (PDF 238KB)This link will download a file for employers to help them provide information to employees where the employer is making remedial SG contributions.

    We consider remedial SG contributions to be contributions made due to underpaid super entitlements. This may include situations where an underpayment of contributions is identified for a quarter which gives rise to an SG shortfall for an employee, or back payment of wages. This may result in you having to make larger than normal SG contributions during the income year for your employee.

    These SG remedial contributions may therefore cause your employees to exceed their concessional contributions cap. This may result in them having to pay additional tax and an excess concessional contributions charge.

    You should be aware that an employee can apply to the ATO for a determination to have these remedial SG contributions disregarded or allocated to another year and therefore not count towards their concessional contributions cap in the year they’re made. The application needs to be made by the employee but of course you can assist them with any necessary information.

    Finally with respect to the classification of workers and tax and super, the Commissioner doesn’t have a position on how businesses should engage their workforce. However, the decision a business makes does result in different tax and super consequences.

    We do find that the majority of workers are correctly classified as employees. Our PAYGW tax gap information demonstrates there’s a strong degree of compliance with employment obligations. For employers, the introduction of STP and other reporting changes will continue to give us insight and an ability to respond in close to real time where non-compliance does occur.

    The incorrect classification of a worker can result in a business not meeting its tax and super obligations, leading to:

    • ABN entitlement considerations.
    • failure to withhold or provision for income tax
    • failure to pay SG
    • consequential impacts on FBT and GST.

    The employee or contractor distinction also exists in other public policy areas such as industrial relations and at state level (i.e. workers compensation and payroll tax). Decisions made by the ATO on whether a worker is an employee or a contractor have no legal bearing on the actions of other agencies.

    The determination of a categorisation of a worker as contractor or employee is based on common law. Therefore it is open to interpretation and based on the individual facts and circumstances in the application in the workplace.

    Historically, our approach to addressing worker classification is to make a determination of employee or contractor based on the facts of each case. This remains our approach.

    Shared challenges

    The terms ‘trust and confidence’, ‘transparency’ and ‘fairness’ can be used in many contexts and often are the lenses through which we are all judged, as is the community confidence in the tax and super system more broadly.

    For our purposes today, I’d like to apply these ‘lenses’ to some of the reform matters we all deal with. At the same time, community discussions and expectations on us all are many and varied and not without challenges.

    We're all dealing with, at times, diverse views on what is the correct payment level of ‘wages’; the correct payment of SG and the level of ‘taxes paid by business’. Across these aspects, the reputation (real or perceived) of sectors, industries and brands becomes a live issue. However, to bring this back to today’s topics I think that recent reporting reforms have opened up the payroll and super systems.

    When I speak to people about the significance of STP, it’s hard sometimes to do it justice. Today, I’ll focus specifically on employers with 20 or more employees who were required to start reporting through STP-enabled software on 1 July 2018.

    Of course you’d all be aware the 12–month transition period for large employers to start STP reporting ended on 30 June 2019. Now, five months into full implementation, I’d like to give a sense of where we are now as we’re well into an operational system which for large business is business as usual.

    Experience tells us that a business operates well when you get the basics right and keep good records. There is also a need for effective reconciliation methods and effective ongoing monitoring, review and a good governance approach.

    Equally important is that when things go wrong, the earlier this is identified the less problematic it is to rectify. This is where more frequent reporting and a real ability by you, your employees and the ATO to monitor provides a solid foundation.

    These building blocks are of course supported by good advice, appropriate and up-to-date accounting systems good payroll software, and well trained staff. From such a base, success is more likely. These observations are not new but remain important principles for success.

    We believe that STP has contributed to influencing employers and generally improved their business by transitioning to a digital environment. Some of the major benefits that are becoming apparent are the reduction of time spent with paper processes and the ability to conduct business away from the office.

    Overall, we now have over 540,000 employers reporting each pay day pay event, reporting on 11.3 million employees. Over 80,000 (98%) of employers with 20 or more employees are reporting through STP.

    I should also mention there are also now over 462,000 (62%) of small employers with one to 19 employees reporting and if we break this figure down even further, 75% of all employers who have five to 19 employees are now on-board to STP.

    It’s pleasing that 82% of pay events lodged haven’t triggered any exceptions and that most STP reports are lodged on time, most SG obligations are paid on time and most PAYGW is paid on time.

    Naturally, as designed, we can now see employers who aren’t paying their SG contributions or are making late payments. We have earlier visibility of under-reporting of PAYGW on activity statements. We have earlier visibility of employers dropping out of the system. We can also see large withholder payment patterns.

    We have progressively started contacting employers who aren’t yet reporting their pay day information to us and who aren't covered by an approved deferral. We're specifically monitoring about 780 substantial employers not reporting and not covered by a deferral and will be taking action in due course.

    For those substantial employers reporting, we’ve completed an examination on late and missed payments. We’ve contacted some 133 large employers and found an underpayment of $2.5 million and raised shortfall penalties of $0.5 million. We also identified $254 million applied to the incorrect EFT code, such as using EFT 60 instead of the correct EFT 70.

    The findings of this examination concluded that 59 substantial employers were paying with the incorrect EFT code (due to being new to this reporting requirement). Some substantial employers were paying monthly rather than on a required more regular cycle for withholding obligations, such as weekly.

    Maturing data integrity

    Throughout the STP journey we applied a basic set of business rules designed to catch the ’boulders’ (i.e. the most obvious discrepancies) and include constant feedback and new learnings to refine our rules and understanding.

    Of course, over time we will refine our processes and be able to look further into the data by working through key questions:

    • is it lodged and is it right?
    • was it paid and was it paid on time?

    As you’d expect, we’re working through the data and gaining insights that help us identify when employers are falling behind with their PAYG withholding or SG obligations.

    As we gain increased assurance in the data and the conclusions we can draw from it, we'll use it to move sensibly into proactive ‘nudges’ to identified employers and notify employees when their employer is falling behind which may of course, include your employees.

    In any event, from the data payroll providers report to the ATO we conduct a ‘health check’ which runs over each pay event received and look to identify potential indicators that a pay event requires attention.

    The most common trigger in our health check is late reports. About 8% of STP reports are received over seven days after staff have been paid; legislatively, STP reports must be submitted on or before the date staff are paid.

    We’re also using the insights and learnings from our health checks to support a range of stakeholders who report through STP. We do this by working directly with software and solution providers to validate the information being received. From this, I’m advised this has led to multiple updates in software products or practices.

    On balance, I think it’s fair to say that as STP has been embedded early, issues identified have been worked through and the quality of the data has improved.

    Common observations

    I’d now like to give you an insight into some of the things we’re seeing from employers.

    Multiple payroll records

    Multiple payroll records can result in incorrect or multiple income statements. We’ve contacted both employers and software providers advising them to confirm if there’s a legitimate reason for the multiple IDs (e.g. allowances out of a different payroll ID).

    This is a crucial step as without an ID the ATO can’t accept reports.

    If an employer is using cloud products it’s imperative to notify us of their Software service ID (SSID) via access manager, their registered agent or to call us.

    Unable to finalise data

    This can occur due to functionality not being implemented fully in business software. We’ve been able to provide advice to these employers and their software providers on how to work around the issues. In these scenarios an employer can lodge a 30 June pay event, with year-to-date amounts and set the finalisation indicator.

    We’re continuing to develop a number of tools, processes and systems and working towards more automated and intuitive systems.

    Since April 2019, all employers have been progressively contacted by way of a reminder nudge which includes advice that penalties may apply. Firmer action is now underway and we’ll be looking to issue final demand letters by the end of November.

    To date, engagements have predominantly been to action cases where payment has been made to the incorrect EFT code. We’ve also sought to help and support others in relation to large withholder obligations including advising correct payment dates or providing correct Payment Reference Number (PRN) for future reference and raising the PAYGW liability in certain circumstances

    As you’d expect by now, if substantial employers fail to start reporting within a reasonable amount of time we will contact them and may apply penalties.

    We can also now use quarterly or monthly activity statement data to match with STP reported information. This data improves our ability to identify potential phoenix cases and intervene earlier. When identifying these scenarios, we’ve been engaging with employers and their intermediaries as well as software providers in order to identify genuine discrepancies. Through this process we’ve seen a number of payments and activity statement reporting patterns and behaviours that are inconsistent with payroll data, including: regularly late, under, missed or incorrect payments/reporting.

    Tax time 2019 experience

    Today, I’ve been describing a lot of things that are about the payroll and super systems in operation 'on the ground'. A useful litmus test is perhaps the experience from Tax Time for the financial year 2018–19.

    We’ve seen our systems successfully process over nine million STP pay events to date. Tax Time was a significant change this year for many employers who for the first time didn’t need to provide a payment summary to their employees.

    The 2019 Tax Time was a big change for us and many employers. Pleasingly, about 92% of STP reporters finalised their information within the first two weeks of July. This has been as a result of much work by many of you, so thank you.

    From the perspective of an employee, over 11.3 million individuals now have the opportunity to log into ATO online via myGov and track their tax and super position.

    Concurrent work complementing STP

    STP is only one part of the broader digital agenda that will focus on delivering better services, reducing red tape to ensure better interactions that will benefit all Australians. We expect to see the continued benefits of STP in future phases; it will be a great advantage for employers and hopefully streamline future obligations.

    As well as the new data sources available through STP pay event reporting, we also now have access to new data from large super (APRA) funds. From these services, funds provide information within 10 days of an employer making a contribution to an employee's fund. This information will allow individuals to access:

    • up-to-date information and therefore gain a better understanding of their super position at any given time
    • see account information for all their funds, on myGov
    • have timely visibility of SG paid by their employer (complemented by STP data).

    As part of our commitment to helping people engage with their super, we've recently been focused on our role in the low balance account reporting aspects of the Protecting Your Super measure introduced earlier this year and the proactive reuniting by us of super accounts and balances.

    In starting our proactive reunification process on 1 November 2019, as at 13 November, we've reunited just over 841,000 accounts worth nearly $1.38 billion. This includes approximately 684,000 accounts worth $1.22 billion that have been transferred into an individual’s active super account and approximately 157,000 accounts worth $161 million directly to individuals’ bank accounts.

    In 2017–18, there were about 935,000 employers and 12.4 million employees in Australia. For 2016–17, we recently estimated the SG net gap, using a methodology to determine the theoretical SG gap.

    When comparing the estimate for 2011–12 and 2016–17 the net gap indicates a declining trend during the five-year period, falling from 6.5% in 2012 to 3.9% in 2017.

    This year we estimate the SG gap for 2016–17 to be $2.3 billion (3.9%). So, overall we estimate that about 95% of employers are paying the SG they're required to pay for their employees. However, the existence of any gap means that some employers don’t pay the correct SG for their employees and their employees are disadvantaged.

    To address this, and as part of a wider series of ongoing actions, we’ve recently examined the SG contributions of some 75 million payment transactions for about 400,000 employers for quarters 1, 2 and 3 of 2018–19.

    Indeed, last month we began contacting 7,500 employers who we’ve identified as having not paid some or all of their SG contributions late during 2018–19.

    As of 11 November 2019, through real-time event based super fund reporting the ATO has received over 255 million individual account transactions for some 32 million accounts from super funds.

    Progressive quarterly reporting of SG payments to employees is now routine. Until this year, we only received an annual aggregated report from APRA-regulated funds.

    At one level, super has many interdependencies and considerations. Central of course is the relationship and record keeping between the employer and employee.

    While it may sound obvious, super perhaps could be viewed as being built on:

    • effective and responsive administration and management
    • essentially requiring mandatory payment of SG
    • how and where super is held or how it is accessed.

    We therefore have a range of support and education products to provide a better understanding of SG obligations for employers and employees:

    But of course, education is at the heart of any long term success or behavioral change. Earlier this year we released a new online SG education course to help employers better understand their super obligations. We developed it as part of our legislative authority to be able to direct and require employers, who are identified as not paying the correct amount of SG, to be required to undertake SG education.

    Although we developed the SG education package to use with the directions power, we’re also encouraging employers to complete this course voluntarily.The course takes about two hours and is free. There’s also an assessment module. Once an employer has successfully completed the assessment (achieved 80% or higher) they will receive a certificate of completion and a copy will automatically be sent to the ATO.

    We also provide tools and calculators to help employers get their SG right.

    Of course, our review and audit program continues and will continue to be a major focus. With the increasing visibility across the payroll and super systems we’re more confident we’re able to target non-compliance with greater and improving precision.

    During 2018–19, from our review and audit case work we completed over 27,000 SG cases raising liabilities of $805 million. This includes the work of the specially funded SG taskforce, which has been operating since 1 July 2018.

    The SG taskforce has completed almost 2,800 cases and raised liabilities of $127.4 million including $14.1 million in penalties in 2018–19. As at 30 September 2019, we’ve closed a further 1,000 taskforce cases and raised $41 million in liabilities.

    Since 1 July 2019, we’ve issued 1,209 Director Penalty Notices to Directors of 854 companies to a value of $75.1 million.

    Proposed SG amnesty

    Closely connected to the current SG landscape, is the government announcement of the proposed SG amnesty. It’s proceeding through parliament and we’ll be ready to administer any final law, noting it isn’t law yet.

    We’ll continue to apply the current law as we continue our review and audit program.

    The proposed bill advises that employers will have until six months after Royal Assent to make their disclosure of SG non-payment for historic quarters before 24 May 2018 back to 1992.

    Pending passage of the law, we’ll continue to process disclosures made by employers lodging SG charge statement (SGC) in accordance with current law as well as our ongoing SG audit work.

    The law requires employers to lodge SGCs and pay the SGC if they haven’t paid their SG to a fund by the due date.

    The SGC includes a liability for the mandatory administration component of $20 per employee per quarter for SCG statements lodged.

    We understand some employers may be ‘holding off’ lodging an SGC statement in anticipation of the amnesty.

    We advise them not to do this as:

    • the law requires them to lodge the SGC
    • if they hold off and they’re notified we’re examining their affairs they won’t be eligible for the amnesty
    • if they lodge now and the law is passed, in its current form it is retrospective.

    If the amnesty becomes law, we’ll update with instructions for employers who are yet to disclose, explaining how they can apply.

    Ahead

    I’d also like to take the opportunity to talk to you about some of the other key digital initiatives we’ve implemented or are in development and in some way relate to STP.

    With the implementation and changes to support cloud software and authentication, this has simplified how businesses and registered agents authenticate and interact with us and other government agencies when using Standard Business Reporting (SBR) enabled cloud software.

    Individuals whose employers are reporting through STP can log into myGov and link to ATO online and view their tax and super position throughout the year, creating transparency around unpaid and late SG contributions.

    We recently launched myGovID. Just to be clear, myGovID is the Federal Government's digital identity solution; it aims to transform how Australians interact with government. This will make it faster and easier to prove who you are when accessing government online services.

    Now I feel like this is quite an important message - for those unaware, AUSkey will be retired in March 2020. For some of you this may be good news.

    If you’re using an AUSkey today, you’ll need a myGovID because we’ll be decommissioning AUSkey in March next year.

    I recommend you contact your digital service provider to confirm the appropriate time to transition, and what you need to do to.

    Conclusion

    So thank you for listening today and allowing me to traverse the range of matters affecting employers and employees.

    The inroads we've made together were neither easy nor insignificant.

    For the ATO we will continue to work with you on the road ahead with a genuine commitment to engage and work in good spirit.

    Thank you.

    Last modified: 27 Nov 2019QC 60763