An informal WA Business News survey has found widespread concern about the aggressive tactics of the Office of State Revenue. Mark Beyer reports.
LAST year the Western Australian Government hailed the abolition of six ‘nuisance’ taxes as a major step forward in tax reform.
One of the side effects of this change is that the State treasury is now more reliant than ever on a handful of taxes, particularly on payroll and property.
Since coming to power three years ago the Gallop Government has hiked stamp duty rates to bolster its finances.
It has also enjoyed windfall gains from the booming property market.
Stamp duty on conveyances is expected to raise $1.06 billion in the current financial year, $220 million more than originally forecast.
As a result, this year’s budget surplus could nearly double, to $142 million.
Yet despite these gains, the Office of State Revenue has become increasingly aggressive in its administration of State taxes, according to business advisers interviewed by WA Business News.
Its zealous approach is manifest most clearly in the crackdown on contractors, with a growing number deemed by OSR to be employees and therefore subject to payroll tax.
Some tax experts now rank WA’s Office of State Revenue as more aggressive than all of its interstate counterparts.
“In our experience, WA’s Office of State Revenue is the most aggressive of the tax authorities around Australia in pursuing revenue,” said Ernst & Young principal Scott Grimley.
The business community is in no doubt as to the motivation of State Revenue.
“Its clearly revenue driven rather than dealing with the reality of the way that people are working,” said Motor Trade Association of WA executive director Peter Fitzpatrick. “I think the [tax office] is pushing right to the edge to get payroll tax out of people.
“I am certainly not happy with the way they are trying to steamroll people.”
PricewaterhouseCoopers director indirect taxes Michael Webb agreed that the Office of State Revenue had become more zealous.
“Even their own guidelines are far from clear cut yet they can impose their interpretation on taxpayers,” Mr Webb said.
“To turn that around can be time consuming and expensive.”
PKF partner corporate services, Ian Olson, confirmed concerns about the new audit approach.
“Our clients are experiencing a lot more aggressive audits,” Mr Olson said.
Bentleys MRI director Graeme Jolley said the number of payroll tax audits appeared to be increasing.
“There is a general feeling that State Revenue is ramping up their operations,” he said.
“They are reliant on a narrow tax base so they have to focus more intently.”
This year’s crackdown on contractors followed last year’s partial amnesty, during which employers could review whether ‘contractors’ were in fact ‘employees’.
OSR’s assistant commissioner revenue services Ric Davies said 340 employers made voluntary declarations under the amnesty.
As a result, the OSR had raised assessments totaling $12.4 million.
Mr Davies said the OSR had endeavoured to clarify its position, issuing guidelines, examples and a detailed questionnaire to help employers determine whether they had engaged ‘contractors’ or ‘employees’.
He acknowledged it was not straightforward, with a range of tests that needed to be applied on a case-by-case basis.
“It is a subjective area, there is no question about that,” Mr Davies said.
Mr Jolley acknowledged that Commissioner of State Revenue Bill Sullivan clearly telegraphed his intention to look hard at contractor arrangements following last year’s partial amnesty.
“Their aggressive approach following the amnesty was pretty predictable,” Mr Jolley said.
Nevertheless, the issue remains clouded.
“You are making your own assessment without any mechanism to get binding advice, other than lodging a completed questionnaire to obtain a determination,” Mr Jolley said.
Mr Grimley expressed similar concerns.
“One of the problems is that it is not possible to obtain private binding rulings in most cases and ‘public’ rulings issued by the OSR are not binding,” he said.
“This means it is often difficult to achieve certainty regarding the position that the OSR will adopt prior to a transaction.”
RSM Bird Cameron partner and state president of Taxpayers Australia Rami Brass criticised the selective approach of OSR staff.
“They tend to rely on case law that suits their own position,” Mr Brass said.
He added that OSR staff could be selective in the tests they used to decide if people were contractors or employees.
These tests could include whether people had advertisements in the Yellow Pages or their own business cards.
Mr Brass also criticised the training of OSR staff, which he described as abysmal, and the long delays in getting answers.
The Australian Taxation Office aims to complete assessments in the space of four months, whereas OSR cases can drag on for two years.
“It’s very hard to focus on your business when you have a large potential bill hanging over your head,” he said.
Mr Brass said yet another concern was the application of the ‘grouping’ provisions, that widened the payroll tax net.
He gave the illustrative example of two consultants who shared a receptionist and an administrator and were therefore deemed to be associated businesses.
BDO Chartered Accountants & Advisers partner Grant Burgess shared many of these concerns.
“Depending on the auditor in question, that will dictate how reasonable they will be,” he said.
“They can be heavy handed.
“They also seem to have a lack of commercial awareness.”
Mr Burgess said one client, a subsidiary of an overseas company, was threatening to leave the State because of its concern over payroll tax administration.
The client’s audit started in March last year, was delayed because the investigator fell ill, and has still not been completed.
“They took a position that is difficult to follow at law and not supported by the facts of the situation,” Mr Burgess said.
However, he has struggled to get a full explanation,
“They say you are caught by the provisions but they don’t articulate the legal reasons why you are caught in that way,” Mr Burgess said.
Grant Thornton business services partner Peter Constantinou said there was no doubt that officers from State Revenue were taking an aggressive approach in their interpretation and application of the employer-employee relationship.
“The unfairness that I can see is that, although there is no doubt most businesses want to comply with the current tax laws, there are instances where people are forced to be engaged as contractors due to the additional costs and the increasing administrative burdens imposed on the employer under traditional employment terms,” Mr Constantinou said.
OSR’s assistant commissioner compliance Rod Richardson said the office had procedures to ensure assessments were reviewed before being issued.
Investigators make a recommendation to a principal compliance officer and a manager in either the investigation or audit area reviews their decisions. Taxpayers unhappy with OSR’s assessment can request an internal review.
Mr Davies noted that staff outside the compliance and assessment units conducted reviews.
Tax advisers interviewed by WA Business News said this process sometimes leads to a revised assessment.
“We’ve had some positive experiences, where they understand the commercial issues involved,” Mr Burgess said.
Mr Grimley said: “The Office of State Revenue regularly takes the view that if a point of law is in dispute, then it should be tested.”
“Insofar as the only independent redress available is an appeal to the Supreme Court, this is a costly and time consuming exercise and many taxpayers decide not to appeal.
“This means that many matters are settled in favour of the OSR and results in an uneven playing field.”
Mr Grimley is hopeful the planned State Administrative Tribunal will be an improvement on the current arrangements.
“It should hopefully see some more questioning of the decisions of the Office [of State Revenue] by an independent body,” he said.
“It will hopefully be easier and cheaper to appeal.
“It might also change the dynamics of the positions they can take.”
The Office of State Revenue is working on two initiatives to try and improve tax administration.
It has already submitted a report to treasurer Eric Ripper on the possible provision of binding public and/or private rulings.
It is also preparing a Taxpayer’s Charter, due to be completed 1 July 2004, which will set out the rights and obligations of both taxpayers and the OSR.
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