EXPLANATORY STATEMENT
STATUTORY RULE 1983 NO. 111
ISSUED BY THE AUTHORITY OF THE TREASURER
The purpose of this regulation is to complete the implementation, with effect from 1 September 1983, of a new system for the collection of tax by deduction at source from certain payments for work that are not subject to the existing pay-as-you-earn system applicable to salaries and wages.
Under the Act, persons making or receiving payments that are to be subject to this new system have responsibilities only after 1 September 1983. Consequently, in prescribing payments that are to be subject to the system and the rate of deduction that is to apply to those payments, this regulation will only have practical effect from that date.
Introductory note
This regulation follows amendments made to the Income Tax Assessment Act 1936 (“the Act”) by the Income Tax Assessment Amendment Act 1983 (Act No. 14 of 1983), Assented to on 14 June 1983. The amendment made by this regulation will insert a new Division - Division 3A of Part VI of the Regulations - which will declare the payments that are to be subject to the system from 1 September 1983 and the rate of deduction applicable to those payments, and prescribe certain machinery provisions that are necessary to implement the new system.
Initially, the new system will apply in respect of certain payments in the building and construction, architectural, consultant engineering, surveying, other professional building and construction services, joinery and cabinet making, road transport, motor vehicle repair and cleaning industries. The payments to be prescribed will, with two exceptions, be confined to those made and
received by persons and firms operating within these industries. The exceptions to this intra-industry basis will be in relation to limited categories of payments from sources outside the building and construction and road transport industries.
Associated with these measures are requirements on householders to report payments made in connection with larger private building projects.
Under the system, a person entitled to receive prescribed payments - a payee - will be required to complete, on a monthly basis, a deduction form setting out his or her name, address and taxation file number.
A person who makes prescribed payments - an eligible paying authority - will generally be required to deduct tax from those payments, complete the relevant details on the deduction forms, forward that tax and a copy of the completed deduction forms to the Taxation Office and issue a copy of the forms to the payees concerned, also on a monthly basis. Householders will not be required to make deductions under the system, but will be required to report to the Taxation Office, also on a monthly basis, all prescribed payments made in connection with any building project the cost of which exceeds $10,000.
Where deduction of tax is required the rate of tax - which will also be prescribed by this regulation - will generally be 10 per cent. If, however, a payee fails to complete a deduction form, the Act provides that the rate of tax to be deducted is to be increased by 15 per cent of the gross payment, that is, to 25 per cent. The Act also provides that the Commissioner of Taxation, on application by a payee who meets certain tests specified in the Act, may issue the payee with a certificate either exempting the
payee from, or varying the rate of, deduction as specified in the regulations.
Finally, the Act also provides that credit for tax deducted will be allowed in a taxpayer’s annual assessment, and contains special rules to allocate credits to partners and trust estate beneficiaries.
Further details of the new arrangements are provided in the explanatory notes which follow.
Regulation 1 will insert a new Division - Division 3A - in Part VI of the Income Tax Regulations. The new Division comprises Regulations 54ZEA - 54ZEJ which are explained in detail in the following notes.
Regulation 54ZEA : Interpretation
Sub-regulation (1) of regulation 54ZEA defines certain terms used in new Division 3A which are not contained in Division 3A of Part VI of the Act.
“eligible paying authority” is not defined as such in the Act, but sub-section 221YHA(4) of the Act contains tests to be satisfied if a paying authority (which is a defined term in the Act) is to be an eligible paying authority. This definition ensures that the same tests apply to determine whether a paying authority is an eligible paying authority for the purpose of these regulations.
“motor vehicle” is defined for the purpose of determining whether payments made for
activities within the motor vehicle repair industry are prescribed payments. The definition includes four wheel drive vehicles, motor cycles and vehicles and trailers designed for off-road use.
“system” which is a term used in the regulations for describing activities in the building and construction industry, is defined to include part of a system.
By sub-regulation (2), other words and expressions used in Division 3A of Part VI of the Act will, unless the contrary intention appears, have the same meaning in the new Division of the regulations as those words and expressions have in the Act.
Sub-regulation (3) is a formal provision that is relevant to the operation of regulations 54ZEF - 54ZEJ which require the furnishing of various forms and remittances to the office of a Deputy Commissioner of Taxation. To establish the office at which persons in various territories are to fulfil these obligations, sub-regulation (3) deems three of the territories concerned to form part of a particular State, and, in the case of the Australian Capital Territory, to be itself a State.
Regulation 54ZEB : Payments declared to be prescribed payments
Under the Act, any payment that is made, or is liable to be made, under a contract the performance of which, in whole or in part, involves the performance of work, may be a prescribed payment. This regulation will declare those payments that are to be prescribed payments from 1 September 1983 and in respect of which deduction of tax generally will be required to be made.
Under sub-regulation (1), for a payment to be a prescribed payment it is necessary that two conditions be satisfied. Firstly, the work must consist of an activity of a kind that is referred to in this regulation and, secondly, that activity must be carried out for a person who is, in relation to that activity, a “prescribed person”. A prescribed person is defined in sub-regulation 54ZEB(4) which is discussed later.
The activities described in sub-regulations (2) and (3) are those which are undertaken in the following industries and professions:
• building and construction (sub-regulation (2));
• road transport (paragraph (3)(a));
• architectural services (paragraph (3)(b));
• surveying services (paragraph (3)(c));
• engineering services (paragraph (3)(d));
• other professional building and construction services (paragraph (3)(e));
• joinery and cabinet making (paragraph (3)(f));
• motor vehicle repairs (paragraph (3)(g)); and
• cleaning (paragraph (3)(h)).
Subject to two exceptions, the payments to be prescribed are those made and received by persons operating within those industries and professions - basically payments made by contractors to sub-contractors within a particular industry or profession - rather than payments that cross the border from one industry to another, for example, a payment by a building contractor for motor vehicle repairs.
The two exceptions to this “intra-industry” basis relate to the building and construction and road transport industries. So far as the building industry is concerned,
deduction of tax will also be required to be made by persons (other than householders) not themselves engaged in the building industry, in respect of payments made in connection with a building or construction project the value of which exceeds $10,000. Mirroring this requirement, a householder who makes payments in connection with a construction project the value of which exceeds $10,000 will be required to report such payments to the Taxation Office.
As regards road transport operations, source deductions also will be required to be made by firms such as breweries, petroleum distributors, brick and concrete manufacturers, newspaper publishers, etc., who in the course of carrying on their businesses regularly engage persons to deliver goods, etc., where the performance of that work involves the recipient of the payment in the exclusive use of his or her vehicle on behalf of the person making the payment.
Sub-regulation (2) sets out the categories of activities in the building and construction industry in respect of which prescribed payments may be made. It covers, in broad terms, all of those activities normally associated with the building, construction, modification, demolition, etc. of structures, roadways and thoroughfares. Subsequent provisions of this sub-regulation extend this general formulation to particular types of activities performed in connection with building and construction work. These activities are:
• painting, decorating and proofing of surfaces of a structure but not including signwriting and the production of murals or similar works (paragraph (a));
• installation of systems or devices for heating, cooking, refrigeration, etc., where the system or device becomes an integral part of the structure (sub-paragraph (b) (i));
• installation or fixing of walls, ceilings, tiles, built-in furniture, plumbing and electrical fittings and fixtures (sub-paragraphs (ii) to (iv) of paragraph (b));
• internal and external cleaning of buildings, and the cleaning of roadways or thoroughfares, where that work is carried out in connection with a building or construction project or the construction of roadways or thoroughfares (paragraph (c)); and
• activities on a structure or on the land where a structure is to be located, which are carried out in preparation for, as an integral part of, or for rendering complete a building or construction project, including site clearance and other earthworks and the erection of scaffolding, but excluding architectural, surveying, engineering and other professional building and construction services performed in connection with a building or construction project and the transportation of goods and materials to and from building and construction sites, (all of which are dealt with separately in sub-regulation (3)) (paragraph (d)).
Sub-regulation (3) refers to relevant activities in relation to other industries and professions which, as mentioned earlier, are to be subject to the source deduction measures from 1 September 1983.
Paragraph (a) of sub-regulation (3) specifies the transportation of goods or materials by road to be an activity in respect of which prescribed payments may be made. For this purpose, the paragraph also defines goods or materials to include construction materials, agricultural produce, livestock, waste, natural resources or merchandise of any description.
Under paragraphs (b) to (e), architectural, consultant engineering, surveying and other professional building and construction services (e.g., the services of compliance and structural consultants, project managers, etc.) are separately specified as activities in respect of which payments can be prescribed payments.
Paragraph (f) describes activities carried out in the joinery and cabinet making industry. It specifies that activities involved in the actual construction of items of joinery (e.g. roof-trusses, frames, cabinets, etc.) which are to become fixtures in a structure are activities in respect of which a payment can be a prescribed payment. The actual installation of these products in a structure is an activity covered by sub-regulation (2) which was discussed earlier.
In paragraph (g), activities in the motor vehicle repair industry, payments in respect of which can be prescribed payments, are described. These activities include the repair, reconditioning, servicing, etc., of any components or parts, for example, engine or body panels, of a motor vehicle and include work carried out by mechanics, panel beaters, auto electricians, etc.
Paragraph (h) specifies the relevant activities in the cleaning industry in respect of which a payment can be a prescribed payment. The cleaning of buildings, ovals,
parks, streets and sporting arenas will all be such activities. Cleaning activities carried out in the course of building and construction activities are excluded from this paragraph, being treated as activities related to building and construction - see earlier notes on paragraph (2)(c).
Sub-regulation (4) defines those persons who are prescribed persons. As indicated in the notes on sub-regulation 54ZEB(1), payments made in respect of the activities referred to in sub-regulations 54ZEB(2) and (3) are only to be prescribed payments for the purposes of Division 3A of Part VI of the Act where those activities are carried out for prescribed persons.
The structure of this sub-regulation involves a separate description of a prescribed person in respect of each class of activities, i.e. industry category, because persons who are prescribed persons will vary depending upon the particular activities involved.
There are, however, two basic tests which identify a prescribed person, either one of which will be applicable to each class of activities described. There is also a separate test that applies to every industry category, the purpose of which is to ensure that persons who conduct agency and similar arrangements which provide persons to perform activities of the kind described will be regarded as prescribed persons. In effect, this will operate as an anti-avoidance provision.
The first of the basic tests will treat a person as a prescribed person if that person carries on a business which consists wholly or principally of carrying out one or more of the activities referred to in a particular industry. Thus, for example, a building contractor who builds houses on a speculative basis will be a prescribed
person in relation to any payments made to sub-contractors (plumbers, tilers, carpenters, carpet-layers etc) for performing the activities referred to in respect of those houses.
Under the second basic test, a person whose business consists in whole or in part of carrying out one or more of the activities referred to in a particular industry will be treated as a prescribed person generally if those activities are carried out for another person, and the payment is made for the carrying out of those activities for that other person. For example, a person whose principal business activity is the manufacture of building materials or components may, as part of that business, also instal those items in buildings. Although the person would not be regarded as a prescribed person under the first basic test as the business would not consist wholly or principally of the installation of those materials or components, the person would be a prescribed person under the second basic test where the work is being done for another person in the course of carrying on that business. In certain industry categories, (e.g. cleaning), however, this second basic test, that is, carrying on a business that consists in whole or in part of performing specified activities for another person, is the primary test.
Under the agency test, a person will, in relation to the carrying out of an activity, be regarded as a prescribed person where that person carries on a business which consists in whole or in part of providing the services of another person to perform that activity. Thus, for example, an agency which is itself not involved in providing architectural services but which contracts to provide the services of architects to another person and then separately contracts with architects to provide those services for that other person, would be a prescribed
person in relation to payments it makes to those architects for performing such services. An agency would not, however, be a prescribed person if it was merely engaged, for a commission, to recruit personnel who contract directly with, and are paid by, the person for whom the services are performed.
Paragraph (a) sets out 4 basic tests for determining, in relation to building and construction activities, who are prescribed persons. The first three of these tests are as described above and are contained in sub-paragraphs (4)(a)(i) and (ii).
The last category of prescribed persons in relation to building and construction activities are those dealt with in sub-paragraph (4)(a)(iii), namely, those who are not prescribed persons under any of the first 3 tests, but who enter into building and construction projects the value of which exceeds $10,000. In effect, this provision will apply to a person who is either;
(i) a householder (as defined in sub-section 221YHA(3) of the Act), that is, a natural person who enters into a contract for a construction project to be undertaken by another person where the payments made are wholly or principally of a private or domestic nature, e.g., a natural person who has extensions to his or her private residence; or
(ii) a person who, being neither a householder nor involved in building and construction activities, undertakes a project where expenses incurred in respect of the building and construction activities are not wholly or principally of a private or domestic nature, e.g., a bank which has alterations or S.R. No. 156 /83
additions made to its business premises that are carried out either by its own building division or by a building contractor. Under this test, a shopkeeper or farmer having building or construction work undertaken for business purposes could also be a prescribed person.
As indicated above, in either of these cases the person concerned would be a prescribed person only if the value of the construction project exceeds $10,000.
There are 3 tests to determine whether a person is a prescribed person in respect of payments for the road transportation of goods or materials. The principal test - which is contained in sub-sub-paragraph (4)(b)(1)(A) and is the second basic test outlined earlier - is that a person carries on a business which, in whole or in part, consists of carrying out road transport activities for another person. There is, however, an important qualification upon this test which relates generally to the delivery of goods and materials by businesses to their customers. The effect of this qualification is that, where a person sells goods and delivers them to a customer, the person will not, under this test (but subject to the test contained in sub-paragraph (ii) (see below)), be a prescribed person in respect of payments made to the person who actually delivers the goods to the customer.
The agency test which is common to each of the paragraphs that specify who is a prescribed person is contained in sub-sub-paragraph (4)(b)(1)(B) but, in relation to this industry category, is also subject to the qualification outlined above. A further test - contained in sub-paragraph (4)(b)(ii) - will treat as prescribed persons certain persons who are not themselves involved in the road transport industry but whose activities are such
that they engage, on a regular daily basis, other persons to transport goods or materials, by road, where the arrangement involves the exclusive use of a vehicle or vehicles provided by those other persons for that purpose. For example, under this test, a manufacturer, brewery, local council, government body or charity which engages an owner-driver to carry goods or materials on a regular daily basis involving exclusive use of a truck would be a prescribed person.
Paragraphs (c) - (f) relate to the provision of architectural, surveying, engineering and other professional building and construction services. A prescribed person in relation to each of these four separate categories of services (described in paragraphs 3(b) to (e)) is a person who carries on a business which consists, in whole or part, of the carrying out of the particular services (e.g. architectural services). On this test, a firm of architects would, in respect of architectural or drafting services performed by another person, be a prescribed person in respect of payments made to that other person. However, an architect would not be a prescribed person in respect of a payment made for engineering services performed for the architect by a consultant engineer. Under the anti-avoidance test, certain other persons providing the services of architects, surveyors, engineers, etc., may also be prescribed persons.
Three tests which apply to determine a prescribed person in relation to building and construction activities are also used to determine prescribed persons in relation to the joinery and cabinet making industry. These tests - which are contained in sub-paragraphs (g) (i) to (iii) - are, briefly -
(a) that the person’s business consists, wholly or principally, of carrying out the specified activities;
(b) that the person’s business consists in part of carrying out the specified activities for another person or persons; or
(c) that the person’s business consists, in whole or part, of furnishing or arranging for other persons to carry out the specified activities.
By virtue of paragraph (h), the three tests outlined above are also relevant to determining who is a prescribed person in respect of activities described in paragraph (3)(f) for activities in the motor vehicle repair industry.
This paragraph also contains an additional test (sub-sub-paragraph (h) (iii) (B)), the effect of which is to treat as prescribed persons persons who have repairs, etc., done in connection with motor vehicles that are to be sold by them. Under this test, for example, a new or used car dealer would be a prescribed person in respect of repair work contracted to another person where that work is to be done on a vehicle prior to its sale.
Apart from the agency test already mentioned, there is only one test to determine whether a person is a prescribed person for purposes of activities in the cleaning industry. That test - contained in paragraph (j) - is one of the carrying on of a business which consists, in whole or in part, of carrying out cleaning activities for another person or persons.
Under this paragraph, a person who carries on a business of providing cleaning services for others would be a prescribed person in relation to payments made for cleaning work performed by other persons for that business, i.e. sub-contract cleaners. However, a person who merely contracts to have his own business premises cleaned would
not be a prescribed person in respect of payments made for that work.
Sub-regulation (5) is a drafting measure to make it clear that, in relation to the carrying out of an activity referred to in this regulation for a partnership, the regulation applies as if the partnership were a person.
Regulation 54ZEC : Other activities constituting a construction project
This regulation is relevant to the definition of “construction project” in sub-section 221YHA(1) of the Act. Under paragraph (g) of that definition, additional categories of activities in relation to structures or land may be prescribed by regulation for purposes of elaborating the meaning of that term when used in the Act. That definition is relevant in determining the kinds of construction projects in respect of which householders are required to report prescribed payments and is also relevant to the requirement on local authorities to report the issue of construction permits. By this regulation, any building and construction activities referred to in paragraphs (a) to (f) of sub-regulation 54ZEB(2) which are not covered in the “construction project” definition in the Act, are to be prescribed activities for the purposes of that definition.
Regulation 54ZED : Deduction from prescribed payments
This regulation declares the rate of deduction to be made from prescribed payments. By sub-regulation (1), that rate is, in effect, to be 10 per cent of such payments unless the payee holds a deduction exemption certificate, in which case no deduction will be made from prescribed payments received by the payee, or a deduction variation
certificate, in which case the rate of deduction will be the lower rate indicated in the certificate. Provisions for the issue of these certificates are contained in sections 221YHP and 221YHQ respectively of the Act.
For administrative convenience, the actual deduction to be made from prescribed payments is to be in whole dollars only. To this end, sub-regulation (2), in conjunction with sub-section 221YHD(5) of the Act, will operate to the effect that, in calculating the amount of any deduction, any cents are to be disregarded. This will mean, for example, that from a payment of $999, the deduction required at the 10 per cent rate will be $99, not $99.90. It will also mean that no deduction will be required to be made from a prescribed payment of less than $10.
Regulation 54ZEF : Forwarding of amounts and forms to the Commissioner
This regulation specifies the office of the Deputy Commissioner of Taxation at which an eligible paying authority is to forward the forms that person is required to complete, together with any deductions made from prescribed payments. These forms and amounts are to be forwarded as follows -
• in a case where an eligible paying authority lodges or will lodge an income tax return -to the office of the Deputy Commissioner where his or her income tax return is or will be lodged (paragraph (c)); or
• in any other case, broadly, to the office of a Deputy Commissioner in the State in which the person keeps his or her principal records, resides or makes prescribed
payments, or else as directed by the Commissioner (sub-paragraphs (1)(d)(i) to (iii)).
Sub-regulation (2) stipulates that if the Commissioner directs an eligible paying authority to furnish the relevant forms and any amounts to the office of a particular Deputy Commissioner, that direction is to be followed and, in effect, over-rides the rules set out in sub-regulation (1).
Regulation 54ZEG : How amounts may be paid to Commissioner
This regulation specifies the means by which and the manner in which amounts deducted from prescribed payments may be paid to the Commissioner. The customary methods of payment are set out in the regulation itself which also provides that remittances are to be paid to a Deputy Commissioner in accordance with the rules contained in regulation 54ZEF.
Regulation 54ZEH : Issue of copies of deduction forms
Sub-regulation (1) outlines the means by which an eligible paying authority may deliver a copy of a deduction form to a payee. These are either personally or by post. Under sub-regulation (2), copies of deduction forms sent by post that are returned undelivered to the eligible paying authority must be forwarded to the appropriate Deputy Commissioner.
Regulation 54ZEJ : Furnishing of information by an issuing authority
This regulation prescribes the office of the Deputy Commissioner at which an issuing authority (defined in the Act as a local authority, municipal council or like body that issues construction permits) is to furnish S.R. No. 156/83
information to the Commissioner as required under sub-section 221YHB(10) of the Act. Such information is to be furnished at the office of the Deputy Commissioner in the capital city of the State in which the construction project is to be carried out, e.g., for projects in N.S.W. the information is to be furnished to the Deputy Commissioner in Sydney.