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Sherry's swipe at self-employed is risky business


1 March 2010
(First published in Australian Financial Review, 26 February 2010)


It's hard to believe that the Rudd Government would open up a deliberate attack against small business. Yet this is what the Assistant Treasurer, Senator Nick Sherry, has done in launching the December 2009 Board of Taxation's report into the Personal Services Income tax rules. The report is a throwback to the bad days of the 1990s when the taxation system was used to serve the industrial relations agendas of labour and unions.

The Sherry development is counter to what we have so far learnt about the Rudd government. When Kevin Rudd grabbed the Federal Labor leadership in 2006 he cemented a shift away from ALP socialist dreaming to a pragmatic approach to doing business.

This built on previous Labor leader Mark Latham observations. He'd stated that the ALP was disconnected from the huge self-employed demographic of more than 2 million workers. Latham's message was that political power cannot be secured in Australia without winning the support of this independent contractor community.

This is supported by federal marginal seat analysis, which shows disproportionate numbers of self-employed/small business people in these seats. They profile as primary swinging voters because they don't think along class-conscious lines.

Self-employed people are 'business people' and 'workers' all at the same time. This duality of status and thinking means they readily swing between the standard political orthodoxy of 'left' and 'right'.

Consequently they don't vote and cannot be organised as a political block. But they do operate with a defining psychology of independence and self-control. It's this to which political parties must gravitate to win marginal seats.

Early in Rudd's leadership he seemed to know this. He released a series of pro-independent contractor policies. These weren't headline grabbers. Instead the policies carefully neutralised a series of anti-small business positions that the ALP had allowed to develop over several decades. Chief amongst these was tax.

For years, the ALP position was that self-employed people 'ripped off' the tax system. They alleged that independent contractors accessed tax benefits not available to employees. The position neatly fitted union agendas to limit self-employment because of its perceived threat to union viability. The tax argument 'justified' aggressive anti-independent contractor agendas.

This argument doesn't fit the facts.

When this tax debate was at its height, the Australian Taxation Office targeted the tax returns of some 65,000 self-employed profiled as likely tax avoiders. Only 714 taxpayers were identified as underpaying, requiring additional tax payments of between 1.9 and 11.6 per cent. Others were owed refunds. No tax 'rip off' was found. Instead the audit reported that the level of non-compliance was lower than what could be expected of any random taxpayer audit.

Still, no matter how small a problem, potential tax loopholes need to be fixed.

Howard and Costello confronted the issue in their 2000 tax reform process. It culminated in the 2001 Personal Services Income (PSI) tax laws. Put simply, individual self-employed people only access tax deductions normally available to any individual taxpayer. Self-employed partnerships receive standard business tax treatment. Self-employed people who work through companies or trusts have to be careful. The ATO will test if any income splitting is a legitimate business activity.

The ATO's approach to companies/trusts under PSI has been tested and upheld by the courts as late as 2008. Consequently tax for the self-employed is now pretty much settled.

Rudd's 2007 election commitment was "no change" to PSI laws. Sherry's press release announcing the recent report seems to ignore this.

He uses pre-Rudd class warfare language. " The use of sham contractors is a threat to the integrity of the taxation system and a threat to working conditions of employees." Sherry thanks "Éthe trade union movement who have raised issues Éin this area with me."

The report recommends a range of new PSI tax measures that would massively complicate and restrict small business. This includes larger businesses having to withhold tax on commercial transactions with small business, forcing small businesses to report the number of clients they have and forcing all self-employed to register for GST. This means removing the existing $75,000 turnover threshold for GST registration.

It sounds like a declaration of (tax) war against self-employed people. The report goes further by recommending the introduction of the 80/20 rule.

When the Howard government proposed to treat contractors who predominately had only one client as an "employee" for tax purposes, this galvanized the self-employed community as never before. The talk-back radio jocks realised that 80/20 would deny them business tax treatment. A media storm and contractor backlash exploded.

Treasurer Costello rushed back from holidays announcing a 'results test' would override 80/20. This calmed the waters. It's the core of PSI laws today.

But Sherry's moves indicate a re-emergence of old Labor. History is that the core, swinging voter demographic of self employed people will swing dramatically against any political party that assaults their business tax status.