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Open Letter to the Prime Minister Seeking Clarification on the Government's Policy on Personal Services Income Tax Laws


The Hon. Kevin Rudd
Prime Minister
Parliament House Canberra

28 May 2010

Dear Prime Minister,

Re: Clarification of Personal Services income Tax

We seek your advice on the position of the government and the Australian Labor Party in relation to any proposed changes to the Personal Services Income tax laws.

In July 2007, Independent Contractors Australia asked the Federal ALP the following question:

    'The ALP supports the principles behind the alienation of personal services income legislation. Does this mean that the ALP supports the existing personal services income tax legislation or are changes proposed? If changes are proposed, what would these involve?'

The ALP replied (through the then shadow minister for small business, Dr Craig Emerson) 'No changes are proposed'. The ALP took this position to the 2007 election as an election promise (see Item 138). Since forming government in 2007, the government has not changed the PSI laws.

On 16 December 2009, however, Assistant Treasurer Senator Nick Sherry released a report of the Board of Taxation recommending numerous and substantial changes to the PSI laws. Those recommended changes are sweeping---they move way beyond that which is necessary to prevent alienation of personal services income and would significantly inhibit the capacity of self-employed people to conduct business. Senator Sherry submitted the recommendations to the Henry Review of Taxation with comments that can only be understood to be a strong endorsement of the Board of Taxation's position.

In early May 2009, your government released the report of the Henry Review into taxation. Recommendation 10 states:

    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.

We note that Recommendation 10 is not one of the Henry Review recommendations that your government has rejected. Rather, it appears that your formal response to Recommendation 10 is to leave it in the 'for consideration' category. That is, the government may act on this or it may not. Can you confirm this or inform us of any other position you may have?

We wish to make it clear to you that we oppose any changes to the PSI laws as they currently stand. We made a submission to the Board of Taxation review explaining our position.

In summary:
  • The PSI laws have taken nearly a decade to settle down and there is finally a welcome level of legal certainty around them.
  • The laws are doing what they were intended to do---preventing the alienation of income. (We note that the Board of Taxation did not produce any evidence about or, it seems, even conduct research into, the effectiveness of the current laws.)
  • There is confusion and misinformation about the true nature of the PSI laws and their implications for small business people.
  • The government should engage in an education campaign to minimize confusion and maximize voluntary compliance.
As we are approaching an election this year, we request clarification about your government's position on the PSI laws. Your government's effective endorsement of the Board of Taxation report and the placing in policy 'limbo' of the Henry recommendation (Number 10) creates an environment of confusion and apprehension about your intent with the PSI laws after the 2010 federal election. Small business people need clarity on this matter.

To assist clarity, we seek a response to the following questions:
  • Does your government and the Federal Australian Labor Party recommit to the statement made in your 2007 election manifesto that 'The ALP supports the principles behind the alienation of personal services income legislation'. Further, that 'No changes are proposed' to the PSI laws?
  • If your government and the Federal Australian Labor Party cannot recommit to the retention of the existing PSI laws, what changes do you propose and when do you plan to implement such changes?

With thanks

Ken Phillips
Executive Director
Independent Contractors Australia

cc
Hon Dr Craig Emerson; Minister for Small Business, Independent Contractors and the Service Economy
Senator the Hon Nick Sherry; Minister for Superannuation and Corporate Law