Transcript: IndirecTV™ video update – July 2011
Large capital projects – Indirect Tax risks and opportunities
Welcome back to Deloitte IndirecTV™.
In this episode, we look at Indirect Tax risks and opportunities that can arise during the delivery of large capital projects.
Customs duty and fuel tax risks and opportunities
If you're undertaking a project worth more than $10 million, chances are you'll import capital equipment and pay customs duty. However, by taking advantage of the available customs duty concessions, such as the Enhanced Project By-law Scheme, Tariff Concession Orders and Free Trade Agreements, you can save up to $50,000 on every million dollars of capital spend.
Recently, a client achieved customs duty savings in excess of $11 million on specialised equipment imported for upgrading an existing minerals processing facility.
Continuing changes to fuel tax legislation means many businesses don't know the extent of their entitlement to fuel tax credits or that a potential cash injection to their business exists by retrospectively recovering unclaimed credits.
We recently identified unclaimed credits of $860,000 for a mine operator, so the cash injection can be substantial.
Worker-related indirect tax considerations
Large capital projects require employees and contractors. This creates payroll tax risks.
Payroll tax is imposed on taxable wages paid by an employer to employees. It's also imposed on certain payments to contractors. Payroll tax rates can be as high as 6%. Project proponents don't always capture contractor payments when remitting payroll tax. In these cases, a large payroll tax liability can accrue and when payment is not made in time, penalties and interest can apply.
Long service leave levies also are relevant for large capital projects, especially in Queensland, New South Wales and the Northern Territory where the levies are imposed on the total cost of all building and construction work. The rate can be as high as 0.525% and, while this might not sound too high, quite often the cost of building and construction work for large projects runs into hundreds of millions. These levies can be actively managed to reduce exposure if contracts and operations are organised properly from the outset.
GST risks and opportunities
Large projects, whether with joint venture partners or not, involve a significant increase in accounts payable transactions, increasing the potential for errors in GST, duplicate payments and GST anomalies. If not identified, these can adversely affect the bottom line or give rise to GST compliance risks.
We've developed an innovative approach, using data analytics, to find these problems. DTect® is our proprietary data mining software that analyses 100% of project transactions to identify GST anomalies and leakages. A refund of previously missed input tax credit entitlements or identification of duplicate payments, for example, could provide extra project funds.
Large projects present opportunities to improve cash flow and working capital requirements by managing the invoicing of milestone and progress payments to ensure GST is collected from the customer before its payable to the ATO. In addition, large capital projects can benefit from the incorporation of an input tax credit accrual methodology, such as the Deloitte Input Tax Accelerator®, to optimise the recovery of input tax credits and create an ongoing cash flow benefit.
For projects involving imported equipment and components, cash flow benefits can be obtained from the deferred GST scheme. The scheme allows eligible businesses to defer paying GST on taxable importations until the first BAS lodged after import. This means that project funds don't get tied up meeting GST obligations between importation and input tax credits being claimed in the BAS.
There are many indirect tax considerations in the delivery of large capital projects. The structuring of ownership of large projects also needs careful consideration in terms of stamp duty, GST and so on. There can be opportunities for establishing structures that best manage future exposures to capital gains tax and stamp duty if parts of a project are to be sold off or if an investor wishes to take a stake in an operation.
For more information about managing the indirect tax aspects of large projects, speak to your usual Deloitte Indirect Tax adviser.
Thanks for watching.