New tax headaches for contractors
by Anna Pha The self-employed have been battling with the GST for more than a year. They have had to register as businesses and obtain an Australian Business Number (ABN), become a tax collector for the government, submit monthly Business Activity Statements and grapple with the often relatively huge compliance costs and liquidity problems. As if that was not enough, many are now facing even more difficulties under the Alienation of the Personal Services Income Act. This Act, which targets individual contractors, is supposedly aimed at employees masquerading as contractors for tax avoidance purposes. In particular, it was supposed to target tax scams in the IT and drafting industries and couriers but many others are caught in its net including innocent workers. The legislation defines a person providing personal services as anyone earning income from personal effort. It describes independent contractors as people who provide personal services, supply their own plant and equipment or tools of trade, and are liable to rectify defective work. The Taxation Office says that people who get at least 80 per cent of their income from one source are not independent contractors. This means that they are deemed to be employees for income tax purposes. Many workers have become contractors, not by choice, not for the purposes of tax avoidance, but because employers have retrenched them and out- sourced their work. The public sector gas and electricity authorities and corporations have retrenched thousands and thousands of workers and out-sourced their work. Maintenance workers, trades people and many others have been forced to re- apply for their jobs as contractors. The companies did this to save their on-costs for sick leave, long service leave, superannuation, holiday pay, workers' compensation and other insurance. Contractors have to fund their own. When the GST was introduced companies refused to employ contractors if they did not have an ABN. And to get an ABN it was necessary to satisfy the Tax Office that they were a business. Under the new legislation, many people who are presently classified as contractors or small businesses now have to meet a series of tests to convince the Australian Taxation Office that they are not simply employees trying to evade tax. The Personal Services legislation and a number of Tax Office rulings that have followed, create many anomalies and a great deal of confusion for those workers concerned. Many of them are deemed to carry on a business for GST purposes and in fact must be a business to get work, but for income tax purposes they are not considered to be businesses. This means that these workers have to carry the burden of the many on-costs usually carried by the employer. At the same time they are being denied many of the tax deductions available to a business. They lose out both ways. Some estimates put the loss of deductions in the range of $5,000 to $7,000 per annum for a contractor. For example, a worker who is a contractor or deemed to be carrying out a business may have an office at home which is a tax deduction. When that worker travels to a job from home or to a client's office that travel is a tax deduction. But if the same worker had employee status then the travel is not a tax deduction. The business tax rate is 30 cents in the dollar, so contractors often pay themselves as low a salary as possible and leave the remaining income in the business as long as possible. (The normal PAYE marginal rates apply to that personal income) Some split the income with a spouse who is not in full-time employment. A spouse, who may do the books, take phone calls, etc., pays tax at a lower marginal rate. The new rules aim to stop such tax avoidance by sham contractors who are, to all intents and purposes, employees. While they may catch a few who rort the system they hit many innocent workers who had already lost many of their employment benefits when they were forced to become a contractor. The government has given de-facto acknowledgment of this situation by giving trades people who came under the prescribed payments system (PPS) a special exemption for the first two years of the legislation up until July 1, 2002. There are many other headaches under the new legislation. Those self- employed whose gross income is over $77,000 will have to pay tax monthly as though an employee, while other businesses and contractors will pay quarterly. They will also have to continue lodging their annual or quarterly Business Activity Statements for GST purposes, as any other business. On the eve of the Aston by-election Treasurer Costello, in a vote-buying exercise, waived a requirement for contractors and small businesses that provide personal services, to get a Tax Office determination on their status prior to lodging their returns. Now contractors will self-assess, determine for themselves whether or not they are a contractor or an employee. They will then live with the uncertainty of not knowing if they got it right. If they didn't get it right they could face a huge tax bill years down the track for back payments plus interest on back payments and a penalty for their mistake. There are other anomalies and contradictory rulings that make it very difficult to self-assess. For example, a semi-trailer driver is not caught up by the legislation but a courier with a one-tonne van is. There is a new eight-page, 68-question form to complete for self-assessment. So much for a simpler tax system! The Government has failed to address the real tax rorts, the real tax avoidance. In addition to the GST the Government has halved the capital gains tax, left negative gearing in place, backed down on measures to deal with tax avoidance through the use of trusts and now (with the support of the ALP) brought in these new laws which make life even more difficult for the self- employed and individual contractors, many of whom are in reality, employees. The legislation fails to address the sort of private investment vehicles popular with high-paid executives wanting to split their income with non- working spouses. The Government has gone about it the wrong way. Those workers who have been forced into becoming self-employed or individual contractors through outsourcing, contracting out of maintenance work or other services should be re-employed as employees with their full entitlements as for any other worker. The outsourcing and contracting out should end. In that way the Government could then more easily legislate and police the system to catch the genuine rorters. But does the Government really want to catch the big-time rorters anyway?