– Parliament of Australia

Labor Senators’ Minority Report

Due to the limited time Labor Senators have had to review both the report and the evidence provided to the committee, Labor Committee members reserve their position in regards to the New Business Tax System (Alienation of Personal Services Income) Tax Imposition Bill (No 1) 2000 and related Bills.

As an observation though, it is clear that this Bill doesn’t represent the Treasurers original announcement or intent in regards to the need to put in place effective measures to countenance the use of interposed entities in order to avoid tax as fore shadowed in the Treasurers original press release No 74 of the 11 November 1999. As a consequence, the Government's failure to proceed with its own announced policy intention seriously compromises the Government's often stated claim that business tax changes need to be revenue neutral.

Furthermore the proposals in these Bills fall far short of the recommendations contained in the Governments own Review of Business of Taxation Chaired by Mr John Ralph.

Senator S Murphy Senator G Campbell
Deputy Chair

Australian Democrats’ Minority Report

New Business Tax System (Alienation of Personal Services Income) Tax Imposition Bills (Nos.1 and 2) 2000 & Related Bills

The Bills

The New Business Tax System (Alienation of Personal Services Income) Tax Imposition Bill (No.1) & Related Bills (the Bills), have cross party support in their intent. These bills seek to introduce greater equity into the tax system by preventing individual tax-payers from diverting or alienating their personal income, derived from their labour, efforts and skills, to another interposed legal entity, in order to reduce their tax burden. In other words, wage earners have been passing themselves off as businesses. Other wage and salary earners with similar work arrangements, but operating in the PAYE tax system, have been paying higher tax rates. These ‘alienation of personal services income’ practices have constituted unfair tax avoidance.

The Australian Democrats have long advocated legislation like this as a tax reform measure. For many years now, the integrity of the income tax system has been threatened as employees by any other name have exited the PAYE system, thereby increasing the burden on those who remained. Organisations such as the CFMEU have also been strong advocates of these tax reforms, since their members paying PAYE have been unfairly disadvantaged in competing for work, where this device has been used to undercut work rates. When in July 1999 the Ralph Report (the Review of Business Taxation) recommended that this practice be ended, since it threatened the tax base and was unfair, and the Coalition Government accepted that recommendation, there was immediate support from the Democrats.

As usual, implementation has posed problems. The difficulty any government was going to face was how to outlaw the alienation of personal services income without unfairly including genuine contractors and businesses in the provisions. The Government have apparently consulted extensively in arriving at the balance in their tests for categorising personal services income, but a number of witnesses criticised their eventual tests as ‘too weak’.

The Revenue

There have been three separate estimates of revenue.

	2000-2001 $m	2001-2002 $m	2002-2003 $m	2003-2004 $m
Ralph Report 6/99	380	480	500	520
Treasurer’s Press Rel 11/99	380	480	495	515
Bills’ EM 5/00	190	290	435	515

These are very substantial sums, to be clawed back from taxpayers not paying their fair share. These estimates still fall far short however of the loss to revenue of $2.2 billion a year estimated by Sydney University’s Australian Centre for Industrial Relations Research and Training.

The prime difference for us to attend to however in considering these Bills, is not the difference between ACIRRT and Ralph, but between the Treasurer’s announcement in November 1999, and the EM for the Bills in May 2000. This difference is primarily because the measure is delayed for certain payees for two years. (For 140 000 contractors registered under the Prescribed Payments System [PPS] at 13 April 1999.)

As the Majority Report outlines, this two-year transitional measure will cost $190m a year. Frankly, the evidence presented for this delay is unconvincing, and the Democrats will propose shortening the transitional period proposed to one year. We have no doubt that if the ATO needs additional resources for this task, for $190 million in revenue a simple cost-benefit analysis will show that it is worth the effort.

More worrying was the statement from a former Treasurer of the Commonwealth, that the “revenue forecast ... has been very substantially overstated.”[50] If Mr Willis is right, a substantial blow to projected revenue would result.

His criticism is primarily because he views the tests to be used for determining tax status as too weak, and the process of administration as suspect. He fears that the taxpayers targetted will evade the tax net and defeat the purpose of the legislation.

The Personal Services Income Tests

It is difficult to tighten the tests without pulling in genuine contractors. Nevertheless, the Australian Democrats will give further thought to this issue. In a more general sense, we are concerned that the approach of the legislation seems to differ substantially from the approach of the Ralph Report. As identified by Mr Willis, the report was concerned to ascertain by a very comprehensive test whether the supposed contractor was operating in an employee-like manner. The legislation applies three very simple tests to determine whether contractors are acting in a business-like manner.

One of the propositions facing us is to require, under self-assessment, two (not one) of the three tests to be satisfied, otherwise the Commissioner must make a ruling using the fourth test as well. This will provide a greater measure of direct involvement from the Commissioner. That has its downsides as a matter of administrative practice, but it may be necessary in the early years of the scheme, to ensure maximum effectiveness. However that does not deal with the danger that under self assessment, people may simply not comply with the test criteria, even as a result of error. The Democrats will therefore assess whether we should recommend an audit report.

Sharp criticism was directed toward the ‘unrelated clients’ test. It was suggested, by Mr Willis, that that test would be able to be satisfied by virtually anyone. The test certainly appears to be loosely drafted and arguably it would be very easy for a tax avoider to produce a set of circumstances at very low cost which resulted in them meeting that test.

Audit Report to the Parliament by the ATO

In order to establish the effectiveness and application of the new personal services tax regime, it may be wise for a percentage of those who claim to meet the tests under self-assessment, to be physically audited. A random sample not exceeding 2 500 would probably be sufficient. This would need to be completed in the early stage of the new regime, to determine the truth of self-assessment, and to suggest better ways of administration, and of testing these matters.

Senator Andrew Murray

Appendices

Appendix 1: List of Submissions

Mr G A Taylor
Australian Contract Professions Management Association Limited
No.2A Australian Contract Professions Management Association Limited
Construction, Forestry, Mining and Energy Union – Construction and General Division
Housing Industry Association
No.4A Housing Industry Association
Master Builders Association
No.5A Master Builders Association
Australian Chamber of Commerce and Industry
No.6A Australian Chamber of Commerce and Industry
Information Technology Consultants and Recruitment Association
Australian Council of Trade Unions
Financial Planning Association

Appendix 2: List of Witnesses Appearing Before the Committee

Monday, 23 May 2000

Committee Room 1S6, Parliament House, Canberra

Grinsell-Jones, Mr Alan, National Director, Industrial Relations, Master Builders Australia

Harnisch, Mr Wilhelm, Deputy Executive Director, Master Builders Australia

Murray, Mr John, Executive Director, Master Builders Australia

Levings, Mr John, Director, Australian Contract Professions Management Association Ltd

Mudge, Mr John Damian, Director of Taxation, Australian Contract Professions Management Association Ltd

Thomas, Mr David, Chairman, Australian Contract Professions Management Association Ltd

Moon, Ms Sheryle, President, IT Contract and Recruitment Association

Kates, Dr Steven, Chief Economist, Australian Chamber of Commerce and Industry

Quach, Mr Brendan, Economist, Australian Chamber of Commerce and Industry

Butler Mr David, First Assistant Commissioner, Business Tax Reform Implementation, Australian Taxation Office

Chapman, Mr Steve, Deputy Commissioner, Small Business, Australian Taxation Office

Smith, Mr Michael, Assistant Commissioner, Small Business, Australian Taxation Office

Smith, Mr Greg, Executive Director, Budget Group, Department of the Treasury

Morschel, Ms Ruth, Director, Tax Services, Housing Industry Association Ltd

Simpson, Mr Glen Ives, Director, Industrial Relations and Legal Services, Housing Industry Association Ltd

Sutton, Mr John David, National Secretary, Construction Division, Construction, Forestry, Mining and Energy Union

Wainwright, Mr Raoul David, Legal/Research Officer, Construction and General Division, Construction, Forestry, Mining and Energy Union

Willis, Mr Ralph, Adviser, Construction, Forestry, Mining and Energy Union