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

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I am self employed because that is the way it works in the building industry, at least for domestic work.
Your rate of income fluctuates with the weather, economy, sickness, injury and holidays.
(See Tax rights under siege, December 22).
You have to pay Fair Trading license fees for the privilege to work.
Large companies off-load their responsibilities for anything by asking you to form a company.
There is no union protection possible in this environment so you are out on your own in every sense of the word.
The risk of not getting paid by builders sending their company broke is high and can send you broke too.
So what we don't need now is to be screwed further by the tax office.
The 'self employed' love the differential tax treatment between contractors and employees because it allows them to claim tax deductions that ordinary PAYG wage earners do not have access to and therefore allows them to pay less tax. (See Tax rights under siege, December 22).
The tax system fundamentally discriminates against employees and it's not surprising that people take every opportunity to become a 'contractor' by registering an ABN, opening a bank account and whipping up a few invoices. We should all be so lucky.
Some contractors and principals bought this upon themselves. (See Tax rights under siege, December 22).
Let's face it, many of these people are employees who try to get a tax advantage (sometimes because of the insistence of their greedy and unscrupulous employers). The solution is simple: tax them all like employees.
I empathise with your comments about the Rudd government's aggressive attack against the small business community via the Board of Taxation's report into the operation of the personal services income tax laws.
(See Tax rights under siege, December 22).
They hit a raw nerve with myself, a self-employed 'sub contractor' to the Federal government (they control 65 per cent of my business).
There are a few government issues coming together that are making me very frustrated.
My parents and myself have supplied services to the government for over 60 years and the story is always the same, we invest in productivity gains to improve services to the government and the public only to have the government through imbalanced contracts and legislative theft. take immoral amounts of that gain and continue to demand more.
We are drowning in procedures and documentation that save them lots of money, and cost us lots of money, and that are counterproductive for the public, we and our industry are at breaking point.
Kevin Rudd's proposed ETS is going to pile on a massive extra tax and paperwork through 'sustainability documentation', without any increase in our remuneration contract, and Kevin's ETS will not stop climate change.
Julia Gillard's changes to industrial relations laws, only increases our burden.
Removal of some benefits of self-employed or sub contractors, would be the last straw and would unleash the pent-up anger in the community.
The last time the government upset me and our industry to this level of anger, motivated all of us to actively and successfully campaign against Malcolm Fraser.
Many of my work associates such as lawyers, accountants, and doctors have had enough with government taxation and interference, pulled the pin early (retired) and have now moved offshore or tour the world.