Tax rights under siege

In a strange move late last week the Rudd government launched an aggressive attack against the small business community. The attack came in the form of the release of the Board of Taxation’s report into the operation of the personal services income tax laws, by the Assistant Treasurer Senator Nick Sherry. These laws cut to the heart of the right of Australia’s two million self employed people to access business style tax treatment.

Senator Sherry’s press release accompanying the report displays a government pandering to the industrial relations agenda of the Australian union movement in particular that of the militant construction union the CFMEU. Australian unions have long detested the existence of self employed people seeing us as working class traitors. Since the late 1980s they have sought to use the taxation system to force us into employment style status.

The Board of Taxation’s report and Senator Sherry’s press release returns to that 80s agenda. They re-raise the idea that self employed people are ‘employee-like’ and should be denied business taxation rights. In particular anyone who works through a business structure (company, trust or partnership) should be denied the ability to claim business tax deductions or pass income to their business partners.

The primary test they want to introduce is the discredited 80/20 rule. This says that if self employed people earn more than 80 per cent of their income from one source in a year, they will be taxed as an employee. It’s an issue the Howard government grappled with in the lead up to the 2004 election. At that time Prime Minister Howard realised that if he insisted on the 80/20 rule it could cost him the election. His Treasurer Peter Costello calmed the roaring small business anger that had erupted by applying the ‘results test’ which stands today. It’s this that the Board of Taxation recommends overturning.

The issue has long roots back to the original design of income tax laws around the period of the Second World War. Then the vast bulk of people were employees. The income tax system was designed on employment assumptions. Self employment started to increase in the 1970’s. Tax authorities saw this as a threat to the operation of the tax system. Unions’ equally don’t like self employment because it significantly reduces unions’ legal authority over the workforce.

Unions and tax authorities found themselves with common self interest in aggressing against the self employed. During the 1990s the taxation aggression took many forms culminating in the Ralph Report of 1999 which raised the 80/20 ‘solution.’ But the idea of self employed people rorting the tax system was proven false by an Australian Taxation Office audit of 65,000 people profiled as ‘income splitters.’ The audit concluded the ‘problem’ was minuscule.

Still, Howard sought to introduce the 80/20 rule. The self employed community is known to be politically volatile but notoriously unfocused. Howard discovered to his horror that this key and huge swinging voter demographic galvanized as never before. A political storm erupted particularly after major radio talk show hosts realized they would be affected by the 80/20 rule. Howard backed off.

This experience taught Australia’s federal tax authorities that it is better to work with the self employed rather than aggress against them. There’s been a sea change in their approach. Following judicial clarification of the ‘results test’ in late 2008 the system has settled down. Internationally it leads the world. North America, the UK and EU remain in confusion.

A hallmark of the Rudd government has been its political intelligence. They’ve realised that electoral success heavily depends on winning a primary swinging demographic drawn from the two million self employed people. They won this group in 2007. Senator Sherry’s endorsement of this new report threatens that.

This recent report raises recommendations that exceed that of the Ralph 80/20 rule. There are proposals to tie small business tax rights to complex ideas of capital investment, new, involved payer and payee reporting requirements, extending ‘attribution’ rules, removing business deduction entitlements and so on. Small business needs and wants tax simplicity. The Rudd government is heading down the path of significant new complexity. They risk stirring the self employed voter demographic against them.

The Rudd government has worked hard to keep this group with them. The ‘education revolution’ building stimulus package is all about keeping self employed tradies working. And there are other targeted programs. But to destroy small business tax rights as recommended is high risk, both politically and economically.

Ken Phillips is Executive Director of Independent Contractors Australia . He is a contributor to the recently released book The Howard Era