One of the more obscure recommendations of the Henry Tax Review (remember it – if you go to the Treasury website, you will now see a series of perky government leaflets setting out the responses, meagre though they were) was as follows:
Recommendation 10: Consideration should be given to a revised regime to prevent the alienation of personal services income that would extend to all entities earning a significant proportion of their business income from the personal services of their owner-managers, whether in employee-like or non-employee-like cases. This regime may also apply an arm’s length rule to deductions arising from payments to associates to ensure deductions reflect the value of services provided.
To tell the truth, I have very little - ok absolutely no – idea what this recommendation means, let alone what problems this recommendation is supposed to be addressing. My guess is – and I am being guided by Robert Gottliebsen and Ken Phillips over at Business Spectator – that this is about ‘cracking down’ on so-called sham contractual arrangements, wherein persons who are really employees pretend to be contractors.
I did read the text around the recommendation in the Henry Review but was none the wiser.
As I understand, there are various tests that the ATO applies to determine the bona fides of a contractor and that these tests are working relatively well, although there is scope for improvement. In fact, the Board of Taxation has launched several cases recently and has won these cases against supposed contractors.
So what would be the upshot be if this recommendation were adopted? Buggered if I know really, but this stuff must surely be causing a degree of consternation in the world of the self-employed and contractors. I understand that there are already some ambiguities – engineering consultants with long projects with one company potentially being deemed employees and freelance writers who submit to mainly one outlet (I’m sure they do not feel like employees).
But the thrust of this recommendation seems to be that for all those ‘sham’ contractors out there – and we ,on the Henry Committee, think there are lots of you – we need to tighten the laws and regulations to make sure that you are taxed as employees. Another angle of labour market flexibility bites the dust.
this is about ‘cracking down’ on so-called sham contractual arrangements, wherein persons who are really employees pretend to be contractors.
Yes, that is what it is about. Many people are alienating income by setting up companies (for example) and operating under contracts through these entities – leaving profit in the company for example, at which they pay 30% instead of, say, 46.5%, or distributing “wages” to associates such as spouses, children, other entities, etc (this allows taxpayers, not only to pay significantly lower tax, but also to gain access to certain family assistance which otherwise they wouldnt be entitled to, and also in some cases, allows people to avoid having to pay child support).
I think any additional legislation on this subject is a completely useless waste of time, because there will always be a loophole ALWAYS… particularly given the multitude of different scenarious and structures that exist for different businesses/contractors. The ATO already evaluates many of these structures on a case-by-case basis. No need to spend extra time and money on additional red tape.
dorinny
26 Jul 10 at 6:00 pm
Whoops… lots of typos there. sorry
dorinny
26 Jul 10 at 6:03 pm
freelance writers who submit to mainly one outlet (I’m sure they do not feel like employees
Yes. And you are not an employee. But the tax department will treat you like one. And treat your editor like an employer blah blah blah. If they just flattened the tax rate none of this bullshit would be necessary.
Adrien
26 Jul 10 at 6:07 pm
The guy in the USA who flew his plane into an IRS building was caught up in this.
Basically it’s a nightmare for any small contractor who relies on a handful of large clients.
The answer is not to introduce punitive and arbitrary regulations, it’s to harmonise tax rates.
Jacques Chester
26 Jul 10 at 6:09 pm
The answer is not to introduce punitive and arbitrary regulations, it’s to harmonise tax rates.
There’s a nasty habit of harmonizing upward, Jacques. Don’t give these thieves any bright ideas.
I also think that harmonization still may not help because of the expenses that are allowable for different categories.
JC
26 Jul 10 at 6:17 pm
As the resident Catallaxy tax lawyer, I agree with dorinny’s able summation.
Rococo Liberal
26 Jul 10 at 6:20 pm
The Government could go some way to solving the problem by harmonising the coporate and individual tax rates. However, that would no abolish the income splitting benefits one gets from forming a company. But, double however, anyone who forms a company should get a tax break anyway, as they are becoming capitalists and we need to encourage people away from just being wage slaves.
Rococo Liberal
26 Jul 10 at 6:24 pm
anyone who forms a company should get a tax break anyway, as they are becoming capitalists and we need to encourage people away from just being wage slaves.
.
That’s just it. But you get punished for doing it. If you’re going to use the difference to scam your way out of tax chances are you have the legal resources to do it. If you’re a genuine sole trader, and many of us have to work for one client only for a substantial period of time, you get punished. It’s crazy.
Adrien
26 Jul 10 at 6:40 pm
I like the idea of every worker being a contractor. I guess this is what they want to stamp out. Better to have hordes of unionised payroll employees working under awards and paying lots of tax.
daddy dave
26 Jul 10 at 9:54 pm
Adrien
We agree again! Now if only you could lose those annoying full stops between paragraphs
Rococo Liberal
26 Jul 10 at 10:14 pm
Interesting this is back, it was a big thing back in 2000 after the GST came in. A bunch of fellow IT contractors I knew had to basically go find additional jobs to jump through the necessary hoops.
For most big companies, accessing the resources of skilled IT workers for long term projects is a must, and preferably engaged full time on the project.
I jump through the hoops because of the following reasons:
1) Generally IT job churn is 2-3 years anyway. The only reason I take a permie job occasionally is to make it easier to borrow money as banks hate to lend to the self-employed.
2) I earn much more as a contractor. Permie salaries are sticky and inelastic above a certain amount (due to management not wanting to pay more to plebes) whereas hourly and day rates for the same role as a contractor is much more in line with skill and experience.
3) If I can legitimately minimize my tax, then I rationally I should. Especially when the Govt blows money like a drunken sailor aka Kerry Packer defense.
Have Fun
Paul
27 Jul 10 at 11:32 am
Control Freaks Must Employ Unions
Denis of Perth
6 Aug 10 at 11:53 am