Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

REGULATION IMPACT STATEMENT

Introduction

This Regulation Impact Statement (RIS) was prepared by the ATO at the original decision making stage and was assessed as adequate by the Office of Best Practice Regulation on 13 November 2015. It was publicly released on 10 February 2016.

A RIS is a document prepared by Government departments and agencies, and, accordingly, this RIS reflects the ATO's assessment of the costs and benefits of each option at the decision making stage. As such, this RIS does not reflect changes arising from further consultation during the legislative development of these amendments.

Background

The Single Touch Payroll initiative was announced by the Minister for Small Business, the Hon Bruce Billson MP, and the Assistant Treasurer, the Hon Josh Frydenberg MP, on 28 December 2014, ^[10] supporting the Government's commitment to reduce red tape by $1 Billion per year. ^[11]

The Single Touch Payroll proposal requires the use of compatible Business Management Software to report information in the required format for digital transmission to the ATO. This information would be created and reported concurrently with other payroll functions, e.g. generating a payslip and creating a file for transmission to financial institutions to pay employees.

Single Touch Payroll is expected to reduce duplication and record keeping requirements. This proposal would see progressive implementation, through a staged transition approach, for real time reporting and voluntary real time payments for businesses reporting their PAYG withholding and superannuation contributions. In addition, Single Touch Payroll will streamline processes associated with bringing on new employees, by providing digital services for completion of tax file number (TFN) declarations and superannuation standard choice forms.

Employers will automatically report from their compatible Business Management Software packages or through payroll providers, at the time they pay their employees thereby reducing the effort traditionally associated with meeting employer obligations.

Single Touch Payroll will assist the ATO to take earlier action to protect honest businesses that do the right thing and to support those who may begin to struggle with meting their obligations. In particular, those businesses who do not fully comply with their PAYG withholding and superannuation obligations enjoy a significant competitive advantage over those that do fully comply and single touch payroll will allow us to identify and support those who are struggling to comply much earlier.

There are flow on compliance effects for other agencies. Single Touch Payroll creates opportunities to provide additional efficiencies across government when sharing real-time information in the future. (e.g. individuals would not need to notify DHS of the change in their income as it is reported at the time of the payroll event).

The recently announced Welfare Payments Infrastructure Transformation (WPIT) project has seen the benefits of the Single Touch Payroll proposal and identified it as a key link and dependency in delivering WPIT and the broader whole-of government digital and simplification agenda. ^[12]

Phase 1 of Single Touch Payroll lays the foundation for this future expansion of benefits, and is a core component of the broader agenda to make it easier for individuals and businesses to transact with government.

A proposal to leverage Single Touch Payroll for real time reporting of payroll data to other agencies is anticipated to be developed by the end of 2016 for federal agencies (Phase 2 of this project) and by the end of 2017 for states and territories (Phase 3 of this project).

Under the ATO's Enabling Digital by Default initiative, there will be a fully integrated digital experience for all entities, allowing digital as the default manner of interacting with the ATO (exchange of information and payments). This will be phased in from July 2016.

Problem

At the highest level this proposal contributes to addressing three key problems:

•

The high cost for business in complying with their tax and superannuation reporting obligations - see 2.1 'Cost of compliance for business'

•

Inefficiencies in government service delivery - see 2.2 'Inefficient government service delivery', and

•

Weaknesses in the Federal Budget position due to non-payment of tax and superannuation obligations and costly modes of service delivery - see 2.3 'Budget improvement'.

Cost of compliance for business

Current employer reporting requirements require businesses to undertake a range of ongoing lodgements with the ATO and other government agencies and entities. These reporting requirements are often not aligned with each other, and there is a separation between the calculation, reporting and payment requirements, all of which give rise to duplication.

Obligations relating to reporting and lodging tax withheld from employees represent a high overall regulatory burden for employers. ^[13] The costs of complying with the PAYG withholding system are estimated to be about $2.5 billion in 2011. ^[14]

The ATO data for the cost to employers of withholding employee income tax is supported by other studies. For example, a 2010 research paper presented to the 2012 Tax Administration Conference, 'The rise and rise of tax compliance costs for the small business sector in Australia' ^[15] , found the average compliance cost of smaller businesses in withholding tax from employee salaries to be around $3,100 ^[16] per annum back in 2010. Multiplying this cost by the estimated 811,000 businesses in Australia today, indicates an annual compliance cost to smaller Australian business of around $2.5 billion (based on 2010 dollars).This figure is potentially much higher today.

When taking on a new employee, employers must provide their ABN and default Superfund details to enable their employee to complete a Superannuation standard choice form and TFN Declaration form.

When paying employees, the employer must:

•

calculate the tax that applies to their income and report and pay it to the ATO at a later date (generally quarterly, but can be as often as weekly)

•

calculate superannuation contributions and report and pay these to superannuation funds on behalf of the employees (minimum quarterly).

In addition, employers are also required to:

•

calculate, report and pay PAYG withholding to the ATO (generally monthly or quarterly) via an activity statement.

•

prepare a report for the ATO summarising the year's salary and tax withheld for employees (annually).

•

provide each employee with an individual summary of income and tax (annually).

•

register for a PAYG withholding role with the ATO (new employers only).

Currently PAYG withholding obligations are reported and paid to the ATO up to three months after payment of the employee wages and salaries upon which they are based (payroll events). Superannuation guarantee amounts must be paid to superannuation funds at a minimum 28 days after the end of a quarter. This delay requires businesses to put in place systems and processes to reconcile data created at the payroll event and collate these for reporting to the ATO for PAYG withholding obligations and to superfunds for superannuation contributions.

Whilst some commercially available payroll software packages can automate much of this process, for many small and medium businesses this remains predominately a manual process or is outsourced to bookkeepers or tax agents.

Over time, the Government's Digital Transformation Agenda is expected to improve the regulatory burden for business. However, providing a digital option to fulfil obligations does not automatically reduce regulatory burden. The burden is reduced by streamlining the actions an employer needs to take (i.e. where obligations can be met by doing their normal business process). Without Government and ATO intervention to help develop and implement compatible processes and systems these improvements will not occur and consequent savings will not be realised.

Inefficient government service delivery

Inefficiencies in government service delivery have been widely acknowledged. 'Citizens often struggle to identify and use the various services offered by the Australian Government and its providers, and businesses have to cope with an ever increasing regulatory and reporting burden. The best public services in the world are integrating and simplifying the delivery of services, streamlining transactional services and making better use of online communication'. ^[17]

Technological advances have resulted in changing community expectations. Citizens already expect a certain level of service based on their existing digital interactions with private businesses, and they bring those expectations to their interactions with government. People want more personalised, accessible and reliable services from government agencies, ^[18] however it is clear that there is a gap between expectations and current government service delivery. In the process of moving to digital services, government needs to provide solutions that go above and beyond the boundaries of traditional systems. In the 'Digital Australia - State of the Nation 2014' report government ranked as the worst business sector in terms of digital sector experiences. ^[19]

Looking more specifically at the current experience of employers and individuals interacting with the tax and superannuation systems, it becomes clear that better use and adoption of technology would improve existing service delivery as well as reduce red tape. For example, in terms of reporting, employers currently:

•

Send the ATO approximately 2.9 million TFN declarations every year

•

Issue 1.9 million annual paper payment summaries to employees

•

Complete approximately 1.6 million PAYG withholding only activity statements ^[20]

There are approximately 16 million employees employed by approximately 811,000 businesses in Australia. Under the current system these employees:

•

have very little visibility of their cumulative tax obligations and superannuation entitlements throughout the year

•

have to wait several weeks after the end of the financial year for pre-fill data to be available

•

often do not realise they have paid too little or too much tax until they complete their tax return

•

may be unaware of their cumulative income position to determine correct entitlements to welfare payments.

Every time an individual commences new employment they complete a paper TFN declaration and Superannuation standard choice form. This requires the employee to complete their personal information and find out the details of the superannuation fund they wish to use. In addition, employees often have to notify multiple government agencies in respect to their employment (i.e. to receive welfare benefits etc).

The above is only a micro example of the existing inefficiencies in service delivery, relying largely on manual processes across government agencies to meet day to day employment obligations. These types of problems are experienced across all sectors of government, and opportunities exist to use technology to support increased agency connectedness and as a result a more seamless end to end experience for citizens interacting with Government.

It should be noted that one of the barriers for enhancing government service delivery through the use of digital platforms is that without regulation there is less incentive for businesses to make the time to change current business practices. Competing demands means that people will often tend to keep doing things the same way unless there is a requirement or strong incentive to change. For example, to encourage uptake of digital service offerings many commercial companies now charge their clients who choose to receive information in paper format (i.e. paper statements) whilst providing services free to those who choose to receive them digitally. ^[21] In addition, initial consultation with software developers indicates they would not be supportive of investing in product development to make their software compatible with digital platforms offered by Government unless they are assured of a viable market.

Budget improvement

The 2015-16 Budget Papers note that while the budget deficit will narrow over the forward estimates period, more work is required to improve the budget position over the medium term. ^[22] Businesses that fail to meet their PAYG withholding and superannuation obligations contribute to a weaker budget position in several ways. Failing to pass on tax withheld from employees to the ATO undermines revenue collections while failing to make superannuation payments on behalf of employees potentially increases future budget outlays through higher pension payments, than might otherwise be the case. Inefficient administration results in administration costs that might otherwise be avoided.

Under the existing PAYG withholding administration, long delays can arise between payroll event and the reporting and payment of PAYG withholdings, particularly for smaller employers who are only required to lodge and remit PAYG withholding amounts quarterly or in some cases, annually. Businesses experiencing cash flow management difficulties can fail to meet their obligations in a timely manner, or at all.

Australia stands out internationally as having some of the longest lag times between employees being paid and taxes being remitted to the Government. This may be a contributing factor to the significant collectable debt owed by businesses. In addition, the ability for the ATO to identify that a business is in trouble and provide early assistance is compromised. In a January 2014 analysis of the collectable debt owed by micro and small/medium enterprises, ^[23] the following outstanding activity was identified:

There is a strong correlation between the number of outstanding lodgements and the proportion of businesses in a debt situation. Under the current lodgement arrangements, The ATO has no visibility of outstanding debt until an Activity Statement lodgement occurs. 20% per cent of businesses that have missed one lodgement have a debt, compared with only five per cent of businesses who have lodged on time. Further, ATO analysis indicates that the likelihood of successful debt collection decreases as the time between the debt arising and action by the ATO increases. ^[25] Earlier detection of a non-lodgement could improve revenue collections.

More timely reporting of these obligations could be expected to contribute to an increased business awareness of pending obligations. The Institute of Chartered Accountants in its May 2014 submission to the Board of Taxation, noted a number of benefits from closer alignment of business tax payment arrangements including:

•

Reducing the timeframe in which funds which rightly belong to the Government (e.g. PAYG Withheld from employee pay packets) are held by a small business in a bank account which generates income for the business - a benefit not enjoyed by other businesses

•

Reducing the risk that such funds may be used inappropriately by the small business (e.g. to meet private expenses)

•

Enabling the ATO to obtain better real time data indicating whether a small business is experiencing difficulty in meeting its tax payment and lodgement obligations (i.e. warning signs)

•

The impact of electronic remittance and lodgement procedures to streamline compliance

•

To foster improved, efficient, business-like practices within the small business sector. ^[26]

Any reduction in Commonwealth agency operating costs improves Australia's budget position.

Why is government action needed?

As noted above, employers are currently spending in excess of $2.5 billion annually in meeting their PAYG withholding obligations. Real time reporting of PAYG withholding and superannuation contributions to the ATO will significantly reduce red tape costs for the community. It will also improve government service delivery, improve integrity in PAYG withholding collections and superannuation obligations. Improved employee commencement procedures will also contribute to these outcomes. The option to pay PAYG withholding amounts at the payroll event will provide a further opportunity for employing businesses to reduce red tape, improve their cash flow management and potentially increase their visibility of the underlying financial status of their business.

These outcomes will not be delivered without government investment due to a need to build the supporting infrastructure within government. The red tape reduction benefits to business will not be fully realised without suitable compatible Business Management Software or an affordable intermediation service. I In the absence of widespread take up, the cost of delivering this initiative is likely to outweigh the benefits expected from reduced compliance costs and improved service delivery.

Prior experience in initiating change, indicates Single Touch Payroll needs a lever to drive change and the best lever is Regulation. Regulation will ensure widespread employer participation in the Single Touch Payroll initiative, without it, it will be very difficult to get 'buy-in'. Australian experience with SBR and e-tax suggests an approach based on voluntary opt-in will not achieve sufficiently high take up rates in a timely manner to ensure commercial development of software.

In addition, without Regulation and full participation by all businesses in Single Touch Payroll, the long term benefits:

•

sharing real time information with other Government agencies (Phase 2 of the project)

•

sharing real time information with states and territories (Phase 3 of the project), and

•

making it easier for individuals and businesses to transact with government cannot be realised.

Business operators are time poor and many suffer 'change inertia' preferring to persist with status quo unless things are not working. Standard Business Reporting (SBR) was introduced in 2010 to save businesses time by collecting ' the right information, for the right government report' ^[27] directly from an employer's business software. Despite its potential benefits for business, since SBR was introduced, just 21,000 businesses have used SBR to interact with government. ^[28] One of the most commonly quoted reasons for the slow take up of SBR is the lack of comprehensive accounting software available on the market. ^[29]

A similar case occurred when the ATO introduced the e-tax client and server software in 1999, providing an option for individual taxpayers to self-prepare their income tax returns and securely lodge them with the ATO over the internet. In the first year, only 27,000 lodgements were received through this digital channel. The uptake by self-preparers grew steadily over the following years, ^[30] to the point where it was the major digital product for self-preparers until the introduction of myTax in 2014. However, it took many years for this growth to take place.

The SBR and e-tax experience is in contrast to an environment where the ATO has made it difficult for clients not to interact with them digitally.

In 2013, the ATO announced electronic funds transfer as the digit default manner in which tax refunds would be provided to individuals. Three million people supplied their bank details and moved away from cheque refunds that year, with only three complaints received (0.0001%). ^[31]

In 2014, the ATO announced myGov as the digit channel for individual taxpayers preparing electronic income tax returns using e-tax or myTax. As at 31 October 2014, over three million clients had created a myGov account and linked it to the ATO. This is the largest ever adoption of an enduring online credential in the shortest possible time in Australia's public sector history.

The financial services industry's superannuation, wealth and investment management electronic commerce (swimEC) program was developed jointly by the superannuation and managed funds industries, to assist employers paying superannuation contributions to multiple superannuation funds when Superannuation Choice was introduced in 2005. While swimEC was a worthy initiative, the adoption of the standards was low across the industry because they were not mandatory. ^[32] As part of the Government's response to the Governance, Efficiency, Structure and Operations of Australia's Superannuation System (The Cooper Review), a Super Reform program of work included the introduction of SuperStream. SuperStream provides a consistent, reliable electronic method of transacting linked data and payments for superannuation. Consultation across the super industry confirmed that the mandating of the standard through regulatory change was necessary to support a successful implementation and transition approach.

The United Kingdom has seen success with the implementation of Real Time Information, a key government program launched by HM Revenue and Customs in April 2013 and requires employers to report in real time (at the payroll event). The United Kingdom found that mandating real time reporting has been the key driver for migration. ^[33] As at December 2013, more than 99% of Pay As You Earn (PAYE) records were successfully being reported in real time. Almost 93% of all employers, and nearly 99% of employers with 10 or more employees, were using the new process to send PAYE information about their employees in real time, and the majority are finding the new system easy to use. ^[34]

Options considered

Consideration was given to a number of options in the formation of this policy proposal. The following three options have been explored through continual consultation with the community:

•

Option 1: Leave the current processes in place.

•

Option 2: Mandatory real time reporting of tax and superannuation obligations for all employers at the time of the payroll event, with the option to voluntarily make payments in real time.

•

Option 3: Mandatory real time reporting and mandatory real time payment of tax and superannuation obligations for all employers at the time of the payroll event.

Consideration was also given to voluntary real time reporting and voluntary real time payment of tax and superannuation obligations for all employers at the time of the payroll event. However, as per discussion in 'section 3 - why is Government action needed?', a low take up rate will not realise the longer term benefits for improved government service delivery. Preliminary consultation will software developers indicated they will not invest in product development without a guaranteed market, further adding to the non-viability of the option. Due to the cost of implementation, ongoing running of multiple systems, low user take up as per SBR experience and lack of commercial support by software developers, this option was ruled out prior to further consultation with the community.

Although option 1 results in no direct change, it is expected that over time the number of businesses using software will increase and this will certainly aid to reduce the overall administrative burden for business. However, the specific compliance costs of PAYG Withholding is about $2.5 billion annually and affects all businesses involved in this regime. Even with software, employers often need to reconcile the amounts calculated each pay against the businesses' PAYG Withholding reporting and payment cycle (weekly, monthly, quarterly or annually). They also need to reconcile annual amounts in order to provide an employee their annual PAYG Payment Summary and lodging the PAYG payment summary annual report with the ATO. Single Touch Payroll is a specialised, purpose built system requiring changes to the systems and processes of businesses, software developers and the ATO to enable business to automatically fulfil their PAYG Withholding reporting obligations as an extension of their natural payroll process (see options 2 and 3). The size and scale of the changes implemented through Single Touch Payroll are unlikely to occur independently of Government or ATO action.

Options 2 and 3 would utilise compatible Business Management Software (BMS) to report information in the required format for digital transmission to the ATO. This information would be created and reported concurrently with other payroll functions, e.g. generating a payslip, creating a file for transmission to financial institutions to pay employees etc. In effect, it provides an automated, streamlined processing of employer related obligations simultaneously with the natural cycle of the payroll event.

Businesses would be reporting PAYG Withholding information at the time the payroll event occurs and no longer required to report this information on activity statements, produce annual payment summaries for employees in relation to payroll data reported through Single Touch Payroll or provide a payment summary annual report to the ATO. Businesses will still be required to calculate and report other tax obligations to the ATO (generally monthly or quarterly) via an activity statement.

Businesses will continue to provide superannuation contributions to Superannuation funds in accordance with the SuperStream payment and data requirements, but under Single Touch Payroll, payroll employers will also report superannuation contribution information to the ATO when contributions are paid to the super fund.

To eliminate the requirement for annual payment summaries where businesses have an obligation to include reportable fringe benefits amounts (currently reported on annual payment summaries), the information would be reported digitally through Single Touch Payroll to the ATO, prior to 30 June following the end of the FBT year (30 March). This is a change for businesses as they currently have until 14 July to provide this information.

Individual employees will have visibility of their payroll related information through their myGov account at any time during the financial year, positioning them to make informed decisions on their tax position prior to lodging their annual tax return. They will also be able to view their annual payment summary online at the end of the financial year (past and current) from all employers in one place at one time.

In addition a new streamlined process for individuals commencing employment will also be introduced. Individuals will either complete their TFN declaration and Superannuation standard choice forms using myGov (referred to as retail onboarding) or directly in their employer's payroll BMS (referred to as wholesale onboarding). Employers will advise their new employees about which method to use based on their business practices. This replaces the need for employees to complete the following paper forms:

•

Tax file declaration [NAT 3092]

•

Superannuation standard choice form [NAT 13080]

•

Withholding declaration [NAT 3093]

•

Withholding declaration - upwards variation [NAT 5367]

•

Voluntary agreement for PAYG withholding [NAT 2772]

Under the retail onboarding option, the ATO would provide a secure online service using myGov where individuals could supply details including their TFN declaration and super choice information to their employers. As the employee is known to the ATO when they use their credentials and authenticate (log-on) in myGov, some information could be pre-filled by the ATO for employee validation. Employers would receive this validated information via a secure channel directly into their BMS. As the information is already validated and would not need to be re-keyed into the payroll software, the administrative burden for employers is somewhat reduced. Additionally, the associated reduction in errors would reduce reverse workflows and unnecessary ATO contact, while improving the integrity of ATO data holdings that are also consumed by other government agencies.

Under the wholesale onboarding option, individuals could supply their TFN declaration and super choice information directly into their employer's BMS, allowing employers to send this information to the ATO.

The ATO will provide Department of Human Services (DHS) with data as under current law. A future phase of Single Touch Payroll will investigate changes to the data provided to DHS as well as benefits to other government agencies (federal, state and territory).

An analysis of each of the considered options is provided in the following table:

Impact analysis - What is the likely net benefit of each option?

The primary impact of Single Touch Payroll on the community is through reduced compliance costs for business and individuals when interacting with government, both in its own right and as a foundational investment toward more seamless interactions between the community and government.

These compliance costs are the most significant and readily estimated impacts. Other impacts include:

•

Businesses will be impacted through earlier detection of those employing businesses that are not meeting their tax and superannuation obligations, which will support a more level playing field. The role of compatible Business Management Software in delivering the Single Touch Payroll experience, will also impact upon software providers, intermediary service providers.

•

Greater automation in the delivery of payroll related information from businesses to the ATO, will contribute to changes in the business environment, in which tax professionals and other business service providers find themselves. However, contribution to this change from Single Touch Payroll is of itself unlikely to be material given the broader evolution of the digital economy.

•

Employees will have greater certainty over their remuneration as real time reporting will provide the ATO with earlier visibility of employers who are not meeting their superannuation obligations and position the ATO to take earlier action. Individuals as taxpayers will benefit through increased collection of income tax revenue payable under the existing PAYG Withholding laws, lower costs in administering the PAYG Withholding system and, in the future, a reduced call on pensions as a result of improved employer compliance with superannuation payments.

Cost of compliance

An important policy problem this proposal intends to address is the administrative burden/cost of compliance on Australian businesses who must comply with the PAYG Withholding regime.

The details and estimates indicate Single Touch Payroll will have a material impact on affected businesses. Overall, the proposal will create an initial implementation cost across affected businesses but has considerable potential to produce on-going annual savings or reductions in compliance costs of the taxation and superannuation systems.

Regulatory Burden and Cost Offset Tables

Below are the tables for regulatory burden and cost offset estimates for each option:

Option 1: Do Nothing - maintain status quo

Note: under status quo the existing compliance cost burden of PAYG withholding is about $25 billion.

Option 2: Stage 1 - Mandatory real time reporting of tax and superannuation obligations for all large employers (with 20 or more employees) with the option to voluntarily make payments in real time. All other employers can opt in voluntarily.

Note: Voluntary involvement could reach 30% of smaller employers . This would increase on-going savings to about $135million and net savings to about $105 million (over a 10 year period).

Option 2: Stage 2 - Mandatory real time reporting of tax and superannuation obligations for all employers with the option to voluntarily make payments in real time.

Option 3: Mandatory real time reporting and payment of tax and superannuation obligations for all employers

Compliance cost impacts

Compliance costs can be reduced when certain characteristics allow taxpayers to ^[35] :

•

standardise and automate business compliance processes

•

integrate with existing business systems

•

minimise manual adjustments and processes.

Single Touch Payroll draws on these characteristics to improve the level of automation and the consequent reduction in or elimination of manual effort by better integrating PAYG Withholding compliance processes with the existing payroll cycles of employers. Single Touch Payroll continues a wider movement to streamline and automate processes and systems using technology.

The extent of implementation impacts will vary. Many businesses involved in PAYG Withholding processes use digital systems that are potentially well aligned with this proposal.

In terms of implementation impacts, the acquisition of new or enhanced digital systems are also being driven by the Government's SuperStream standard which is requiring a shift by no later than 30 June 2016; as well as the recently announced "Enabling Digital by Default" initiative to make digital systems the default means of interacting with Government agencies.

Single Touch Payroll however, is a specialised, purpose built system involving software developers , businesses and the ATO to produce one integrated system and supporting processes to automatically handle PAYG withholding obligations as an extension of the natural payroll process. This is not likely to occur without Government and ATO intervention.

It is intended that a pilot will be conducted in the latter half of the 2016-17 year to identify implementation issues for businesses and potential strategies to support them to transition to a Single Touch Payroll environment. By trialling this prior to widespread implementation it enables:

•

the identification and resolution of problems

•

the identification of appropriate support mechanisms required for transaction

•

the development of an appropriate transition timeframe.

A similar pilot was conducted in the UK and was found that the 'pilot boosted confidence that the process worked well and provided evidence that it would reduce administration burdens for employers'. ^[36]

The timing of taxation payments can have impacts on a business's cash flow and can arise where employers remit PAYG Withholding earlier. For some businesses cash flow impacts could be substantial. Option 2 mandates real time reporting at the time of the payroll event with the option to voluntarily make payments in real time. This option removes any potential cash flow impacts, except where employers choose to voluntarily alter their payment profile.

Options analysis

The table below considers the impacts of:

•

Option 1 - 'Leave the current processes in place'

•

Option 2 - 'Mandatory real time reporting of tax and superannuation obligations for all employers at the time of the payroll event, with the option to voluntarily make payments in real time.

•

Option 3 - 'Mandatory real time reporting and mandatory real time payment of tax and superannuation obligations for all employers at the time of the payroll event'.

The impacts rely on the proposed approach having an initial pilot and progressively transitioning different sized businesses into Single Touch Payroll.

Economic and social impacts

Software developers

In a mandated environment, Single Touch Payroll will greatly affect the software developer stakeholder group. It requires them to play a crucial role in the development of the required software, allowing software developers to engage with various businesses and understanding their needs and demands. Software developers may need to potentially remodel their business to facilitate increased demand of their product and provide support required for upgrades and first time users. Through early engagement, software developers have indicated they are not willing to invest in developing compatible software unless there are publicly announced mandatory timelines, communication and legislations.

Tax professionals and payroll providers

Tax Professionals will potentially see a reduction in the resources required to assist their clients in meeting PAYG Withholding obligations in the future. While this may mean a reduction in the demand for professional services to complete this work, it is anticipated that practitioners will shift their business model away from simplified tax conformance, in favour of value added services, both in terms of functional and advisory services.

Single Touch Payroll will have limited direct impacts on payroll providers. Their ability to make payments to employees on behalf of their clients (businesses) could potentially be hindered if those businesses are adversely affected by Single Touch Payroll. Some businesses already send payroll providers data automatically however, business processes for payroll providers could potentially become easier if businesses move to a digital environment and information is automatically transmitted to payroll providers, removing the need for them to manually key data.

Employees

The wellbeing of employees will increase as a result of more streamlined processes for providing employment commencement information to their employer, as they will have more time to devote to the things they value. Employees will have greater visibility (via ATO Online) of their remuneration with information from all their employers provided in one place, better positioning them to make informed choices about their employment decisions and having greater certainty about their retirement income position. On behalf of the employees, the ATO will be able to take action earlier where employers fall behind in meeting employee superannuation obligations.

Employees will also experience improved timeliness in the availability of pre-fill information to streamline tax return preparation. It will no longer be necessary to wait for businesses to report annual income to pre-fill tax returns, supporting the future direction of automated tax returns.

Government and the Community

Improved business compliance in meeting PAYG Withholding and superannuation obligations and more efficient delivery of government services, will improve the budget position to the benefit of present and/or future taxpayers.

Improved compliance with PAYG Withholding contributions will increase tax revenue collections from the existing tax base. This assumes that a business' failure to meet its PAYG Withholding obligation is not merely shifted to an alternative tax obligation, such as income tax. Improved compliance with superannuation contributions will result in higher superannuation balances for some employees at retirement and a lesser reliance on the Age Pension.

More cost efficient administration of the tax system will also contribute to a stronger budget position. The preferred option for Single Touch Payroll is estimated to reduce administration costs in the order of $135 million per annum for phase 1, stage 1 reaching $295 per annum once full implementation of phase 1 is complete (noting that phase 1, stage 2 is subject to a future business case). As a foundational investment, Single Touch Payroll will support further efficiencies in the cost of government service delivery through the provision of real time employment and employee remuneration information.

The requirement to interact digitally, increases support for the Government's e-Government and Digital Economy policy and provides a foundation to increase efficiency across government through cross agency sharing of real time reported information.

Future Opportunities

Initial consultation with government agencies reveals opportunities to assist with reducing the cost of compliance to businesses and individuals through the collection and sharing of a broader range of payroll data elements. Single Touch Payroll reporting of PAYG Withholding and superannuation contributions provides the foundation for these whole-of-Government opportunities.

Some key examples include:

•

Under Single Touch Payroll, real time employment information could be made available to the Department of Human Services (DHS) to significantly improve the administration of the welfare and child support systems. This Department's proposed Welfare Payment Infrastructure Transformation Program would leverage Single Touch Payroll to reduce the reporting burden on welfare recipients and child support clients whilst reducing the size and frequency of incorrect payments.

•

The Department of Employment outsources job placement contractors who are currently required to verify the employment of scheme participants, which involves obtaining evidence, conducting interviews and collation and submission of data. At approximately 400,000 placements annually, the Department estimates there are potential savings to the sector if employment could be verified using data collected via Single Touch Payroll.

•

The Department of Immigration and Border Protection require holders of certain classes of visas to self-report on earnings and time spent working. This creates a burden on individuals and a burden on the Department to manage the data. Single Touch Payroll could eliminate this burden and ensure the data collected is accurate, however it should be noted business software would need to capture this information.

•

The Australian Bureau of Statistics indicates enhanced data available through Single Touch Payroll could be used to generate a new economic indicator to help identify turning points in the business cycle more efficiently. There is also opportunity to improve the quality of non-response imputation and survey outputs in the areas of employment participation which will improve the overall quality of reports produced and used by decision makers.

The Government has requested that a proposal to leverage Single Touch Payroll for real time reporting of employment data to other federal agencies be presented by the end of 2016 (Phase 2 of this project), and by the end of 2017, options be developed for extending the sharing of real time reporting of employment data with states and territories (Phase 3 of this project).

Single Touch Phase 1 lays the foundation for these longer term benefits.

Consultation

The ATO conducts a four-phase approach to consultation and co-design.

Phase 1 Consultation Outcomes

Phase 1 - Preliminary consultation and assessment activities

Preliminary consultation and assessment activities were conducted utilising existing forums and networks to inform Single Touch Payroll design principles and early concepts.

The following forums and networks were included in phase 1 preliminary consultation activities:

•

Small business

•

Software developer

•

Payroll providers

•

ATO Tax Practitioner Advisory Group

•

Business Activity Statement Agent Advisory Group

•

Small Business Liaison Group

•

Software Industry Partnership Office

•

Software Relationship Management Group

•

A number of government departments

The key findings from this phase were:

•

Businesses are generally ready to engage in Single Touch Payroll, but some will require significant support and education to make the change.

•

Software developers indicated there was recognition that pricing and product range would need to allow accessibility for all types of businesses.

•

A long lead time would be required to allow development of product and strong engagement in the design process was essential. The learning from the United Kingdom experience could be incorporated in an Australian design so as to improve the product development process.

•

It was clear that developers will not invest in building compatible software unless there is a clear roadmap which includes publicly announced timelines and assurance a digital environment will be required.

Phase 2 Consultation Outcomes

Phase 2 consultation has been divided into two stages.

Stage 1 - consultation included the following:

•

Targeted consultation

•

A public discussion paper inviting community comment

•

A Round Table discussion chaired by the Small Business Minister.

Targeted consultation has included:

•

Individuals: A total of eight individuals were involved in a focus group interview of which all started a new job within the previous six months.

•

Businesses: A total of 10 business participants, from various industries and of various sizes were involved. Participants were either business owners or the payroll officer of a business.

•

Tax professionals: A total of 20 tax professionals, with business clients from various size practices were involved, including 10 BAS agents and 10 Tax agents.

•

Superannuation funds: A total of 4 APRA-regulated superannuation funds were involved.

Following the announcement of Single Touch Payroll on 28 December 2014, the community was invited to respond to a discussion paper outlining the Single Touch Payroll proposal. The paper was published on ato.gov.au and included three potential Single Touch Payroll options:

•

Option 1: Leave the current processes in place.

•

Option 2: Mandatory real time reporting of tax and superannuation obligations for all employers at the time of the payroll event, with the option to voluntarily make payments in real time.

•

Option 3: Mandatory real time reporting and mandatory real time payment of tax and superannuation obligations for all employers at the time of the payroll event.

The discussion paper also included the streamlining of TFN declarations and superannuation standard choice forms.

The formal consultation period for the discussion paper ran from 12 February 2015 to 6 March 2015. 135 written submissions were received in response to the Single Touch Payroll discussion paper.

A Small Business Roundtable meeting was held on 14 April 2015.

A number of key themes arose in the feedback received from stage 1 consultation as outlined in the table below.

Following careful consideration of the views expressed during the stage 1 consultation, the Minister for Small Business released a further press release on 10 June 2015 advising the Government " recognises the cash-flow implications for business of real time payments, and will therefore only be consulting further on real time reporting and voluntary real time payments as an option...With this in mind we have asked the Treasury and the ATO to continue to consult with the business community and the software industry on the scope and timing for the Single Touch Payroll initiative and the feasibility of conducting targeted pilots from July 2016." ^[37]

This clear Government guidance has led to the refinement of the proposal, with ongoing consultation now focusing on:

•

Real time reporting with the option to voluntarily pay at the time of the payroll event

•

Timing of transition to real time reporting

•

Simplifying the process of bringing on new employees through streamlining TFN declaration and superannuation standard choice forms

•

Feasibility of a pilot with a focus on, but not limited to, small business in 2016.

Stage 2 - June 2015 Consultation

The ATO, in conjunction with the Treasury, commenced stage 2 consultation in June 2015, engaging with the community across a variety of audience groups.

The key findings are outlined below.

The Roundtable on 24 June 2015 highlighted the need for additional consultation with large business.

Stage 2 - July 2015 Consultation

After the second Roundtable concluded 24 June 2015, the ATO was asked to undertake further consultation with the Business Council of Australia, additional large employers and software developers to seek management's views rather than functional payroll views on the Single Touch Payroll concept and hear any concerns.

14 consultation sessions were conducted between 23 July and 31 July 2015 with:

•

Business Council of Australia

•

Industry representative of large business

•

Software Developers

The key themes discussed were around the support and commitment of the Single Touch Payroll concept, transition, costs and a low or no cost software solution

The overwhelming thread through all the conversations emphasised:

•

certainty of legislation (co-designed with business) with no future changes

•

clarity in technical specifications (co-designed with developers) with no future changes

A summary of the key themes is provided below.

Along with providing valuable business insights, the consultation sessions also enabled us to capture a range of comments we heard during these discussions.

The below table provides a snapshot of comments and sentiments made by a variety of segments.

Recommended solution

Recommendation

Option 3 (mandatory real time reporting and payment) is estimated to deliver greater compliance cost savings to business and overall benefit to the community than the status quo or Option 2 (real time reporting and voluntary real time payment). Consequently, in accordance with the Government's RIS requirements Option 3 would be the recommended option.

Throughout consultation employers repeatedly voiced strong concerns about the cash flow impacts of real time payment, particularly in the transition period when payments are brought forward. Given that around 90% of the compliance cost benefit of Option 3 comes from the streamlining of reporting arrangements and improved procedures for engaging employees, an implementation approach focused on securing these benefits of single touch payroll, with optional real time payment, (Option 2) would also deliver significant benefit to the community.

Implementation and Evaluation

Implementation

Single Touch Payroll is subject to the Department of Finance's ICT Two Pass Review process and Gateway Review process.

The Single Touch Payroll initiative will be managed using established program and project management methodologies and governance arrangements applied in the delivery of all Government initiatives administered by the ATO. The ATO's experience in implementing other complex initiatives such as SuperStream will be beneficial and inform how the transition is administered.

Legislative change will be required to support employee-level event-based reporting, to align the timeframes for reporting with the payroll event and to support the reporting of superannuation information to the Commissioner of Taxation.

The proposed phased implementation will assist businesses to transition to Single Touch Payroll. Employers will have a minimum period of 12 months within which they can transition. Their transition will be supported by communications, change and stakeholder engagement plans that ensure the community have the opportunity to contribute to the design of support structures and frameworks and are supported during the change.

Transition Approach

Taking into account the feedback from consultation activities, the ATO will progressively implement the Single Touch Payroll initiative by leveraging compatible Business Management Software and payroll providers to report PAYG Withholding automatically as part of the payroll event.

The transition approach will comprise of 2 separate stages:

Stage 1

Pilot

From January 2017, the ATO will conduct a pilot with a focus on small and medium business (SME) with the inclusion of large business that elect to participate. The pilot will provide opportunity:

•

for businesses to test the ease of use of Single Touch Payroll and champion the product.

•

to help establish the full extent of the red tape reduction benefits expected from implementation.

•

to inform future transition arrangements for small businesses with less than 20 employees. (see Small Employers Transition below).

The full scope of the pilot will be developed through co-design activities with key stakeholders.

Early Adopters

From July 2017, the Single Touch Payroll system is anticipated to be available for businesses who wish to start using Single Touch Payroll. The ATO will provide the ability and support for early adopters to commence Single Touch Payroll reporting with voluntary payments.

Large Employers Transition

From July 2018, the ATO will support the transition for larger employers with 20 or more employees. Large employers will be able to transition during a 12 month period at a time suitable to their business model.

Large Employers Mandated

All employers with 20 or more employees (100,000 businesses, approximately 13 million employees) will be required to report using Single Touch Payroll from 1 July 2019. The Single Touch Payroll initiative will seek legislative change to support this.

Stage 2

Small Employers Transition

A decision on whether to mandate real time reporting for small employers with less than 20 employees (710,000 businesses), and the timeframes for transition, will be subject to a further decision by Cabinet before the end of 2017 and will be informed by the outcomes of the pilot. A subsequent RIS and business case will be developed for this stage of the transition.

Risk Management

As part of the ATO's project management approach, a risk log has been created that contains all risks and will remain active over the life of the project to ensure identified risks are assessed and managed appropriately. See Appendix B for the extract from the risk log which shows the risks with a residual rating of red only.

Evaluation

A formal benefits management plan is in place for the Single Touch Payroll project. The following table highlights the key outcomes to be measured.

Benefits are not expected to be realised until full deployment of the solution and transition of each business group.

RIS Process

On 23 December 2014 the then Minister of Small Business and the then Assistant Treasurer announced the Government will cut red tape for employers by simplifying tax and superannuation reporting obligations through Single Touch Payroll. At the time, an early assessment RIS was not available contrary to best practice.

Appendix A: Risk Log

Single Touch Payroll Register

The following table is an extract from the Single Touch Payroll risk log which shows the major risks associated with the Single Touch Payroll project.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Single Touch Payroll reporting

This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

This Schedule contains several Parts introducing related, but discrete, amendments to:

•

introduce STP reporting to reduce the costs of complying with the PAYG withholding system for employers and improve the ATO ability to monitor compliance with employer SG obligations (refer Part 1);

•

allow the ATO and employers to implement streamlined commencement procedures for new employees, which will enable employees to complete superannuation standard choice forms and TFN declarations on the Commissioner's online service (refer Parts 2 and 3); and

•

improve the Commissioner's capacity to validate TFN information in order to support the other amendments in this Schedule (refer Part 4).

Human rights implications

The amendments made by this Schedule engage the prohibition on arbitrary or unlawful interference with privacy contained in Article 17 of the International Covenant on Civil and Political Rights (ICCPR).

•

The amendments in Part 1 require certain employers to provide a range of personal information to the Commissioner about their employees.

•

The amendments in Part 2 allow the Commissioner to disclose an employee's TFN and protected information to their employer for the purposes of informing the employer of their employee's choice of fund.

•

The amendments in Part 3 allow the Commissioner to make available to an employer (the payer) the information in an employee's (the recipient's) TFN declaration, where the recipient has made a TFN declaration to the Commissioner in relation to that payer.

•

Part 4 allows the Commissioner to provide a payer with both positive and negative validation of a person's personal details, including their TFN, where the Commissioner is satisfied that the person is a recipient of the payer and that the recipient has given a TFN declaration to the payer.

Part 1 Reporting by employers

These reporting obligations are compatible with the prohibition, as they are not arbitrary or unlawful. In addition, they are aimed at legitimate objectives and constitute an effective and proportionate means of achieving those objectives.

The United Nations Human Rights Committee has stated, in their General Comment Number 16, that:

•

'unlawful means that no interference can take place except in cases envisaged by the law. Interference authorized by States can only take place on the basis of law, which must itself comply with the provisions, aims and objectives of the Covenant [the ICCPR]'; and

•

'the concept of arbitrariness is intended to guarantee that even interference provided for by law should be in accordance with the provisions, aims and objectives of the Covenant and should be, in any event, reasonable in the particular circumstances'. ^[38]

The objectives of the STP reporting regime are to leverage SBR-enabled software to:

•

reduce the compliance burden of reporting in relation to the PAYG withholding regime for employers; and

•

increase the Commissioner's access to timely employee-level information relevant for monitoring compliance with employer SG obligations.

The amendments constitute an effective and proportionate means of achieving these objectives, as the information to be reported by employers would typically be limited to that information they are already required to report under other taxation laws. The STP reporting regime introduces changes to the manner in which information will be reported and the timing and frequency of that reporting. To the extent that any additional information is required to be reported, the objective is to improve the Commissioner's ability to effectively administer the SG and PAYG withholding regimes.

The PAYG withholding regime is a key part of Australia's income tax system, involving amounts being withheld during the year as income is earned, to ensure that people can meet their annual tax obligations and eliminate large end-of-year income tax debts. The SG regime, which provides for compulsory contributions by employers to complying superannuation funds in respect of their employees, is an important part of Australia's superannuation system, aimed at providing income in retirement for such employees. By enhancing the Commissioner's ability to administer these regimes, these amendments are aimed at a legitimate objective.

These reporting obligations are designed to align with an employer's payroll processes and other existing reporting obligations to reduce the compliance costs imposed on employers. As such, the amendments constitute an effective and proportionate means of achieving these objectives.

Taxpayer information held by the ATO is subject to strict confidentiality rules that prohibit ATO officers from making records or disclosing this information unless a specific legislative exemption applies (see Division 355-B).

Parts 2 (Choice of fund) and 3 (TFN declarations)

The objective of these amendments is to allow the Commissioner to make available a streamlined-on-boarding process for employers commencing new employees. The new streamlined procedure enables employees to fill out standard choice forms and TFN declarations on the Commissioner's online service rather than requiring an employee to provide them directly to their employer.

The handling of TFN information is regulated by the binding Privacy (Tax File Number) Rule 2015 (TFN Rule), issued by the Privacy Commissioner under section 17 of the Privacy Act 1988 . The TFN Rule provides that TFN information must only be used or disclosed for a purpose authorised by a taxation law.

In Australia, the main protection for taxpayer confidentiality is provided by a general prohibition on the disclosure of taxpayer protected information by ATO officers (see Division 355) and this is supplemented by specific rules in relation to TFNs (see sections 8WA and 8WB of the TAA 1953).

As standard choice forms and TFN declarations contain TFN information as well as protected information, these amendments are needed to ensure the Commissioner is able to pass the information contained in each form to the employee's employer.

The new streamlined procedure is expected to reduce the need to re-key information and therefore result in a lower administrative burden for employers. The amendments constitute an effective and proportionate means of achieving this objective as the new process is voluntary. Furthermore, the amendments simply allow information that would under existing processes pass directly between an employee and employer, to pass through the Commissioner.

The amendments also do not affect an individual's choice to refuse to quote their TFN.

Part 4 TFN validation

The objective of the amendments in this Part is to improve the Commissioner's capacity to validate TFN information. This will have increasing importance for the ATO's data-matching activities that support the streamlined on-boarding procedures and STP reporting introduced by the other Parts of this Schedule.

These amendments allow the Commissioner to provide payers with both positive and negative validation of a recipient's personal details, including their TFN. Currently, the Commissioner can only negatively validate a PAYG recipient's TFN.

These amendments constitute an effective and proportionate means of achieving these objectives as the Commissioner may only exercise these powers in specific circumstances. The Commissioner must be satisfied that the person (whose information is being validated) is a recipient of the payer (who is requesting the validation) and that the employee has given a TFN declaration to the employer. The Commissioner must also, having regard to the information (if any) that the Commissioner has recorded for the TFN given, be satisfied that it is reasonable to give the notice validating the information.

The TFN validation services offered by the Commissioner remain voluntary for employers. The amendments also do not affect an individual's choice to refuse to quote their TFN.

Conclusion

This Schedule is consistent with Article 17 of the ICCPR on the basis that its engagement of the right to privacy will neither be unlawful (including by reason of these amendments) nor arbitrary. To this extent, this Schedule complies with the provisions, aims and objectives of the ICCPR.