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A contract on the Rudd government


14 June 2010

It's been well covered by Robert Gottliebsen how Assistant Treasurer Nick Sherry is handing the small business constituency to Tony Abbott on a plate.

Sherry's blunder has been to endorse a Board of Taxation recommendation to massively change tax arrangements that determine micro-business access to business tax treatment. Sherry passed the recommendations on the Personal Services Income (PSI) tax law to the Henry Review.

The update on this is that Henry's recommendation number 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."

Would somebody kindly explain what this Treasury double-speak actually means! Certainly to anyone in small business, what the government intends to do with their tax status is now a mystery. The government hasn't rejected recommendation 10 or given a view. So my organisation, Independent Contractors Australia, has written to the Prime Minister asking him to provide clarity. One thing small business hates is confusion and uncertainty.

It hasn't taken long for the Abbott coalition to make their position clear. They have called for the government to keep the current laws.

What's odd in the Rudd government's moves, is that the PSI laws seem to be doing their job. The intent of the laws is to allow small and micro business people to genuinely access business tax treatment. But the laws are also intended to stop people from turning their personal income into business income and illegitimately obtaining business deductions. It's a balancing act.

The Australian Taxation Office just recently, again won a case against a contractor who was in this category. The Administrative Appeals Tribunal ruled that the IT contractor's alleged business income was in fact his personal income and should be taxed accordingly. We've explained the case here.

What's been strange is that the Board of Taxation, Sherry and Henry all seemed to have ignored the ATO's string of successful prosecutions under PSI. The recommendations for change are not supported by a solid analysis of the current application of the laws. Instead, as Robert Gottliebsen has argued, the government would create a complex and discriminatory anti-small business tax environment if it implemented the recommendations.

It's ironic, that as Australia is looking to harm micro-business people on tax ,the new UK government is moving in a positive direction.

Few people realise how damaged the UK Labour government was over its small business tax approach. It had a neat little tax ruling called IR35 that made business tax treatment for micro business people hugely complex. The ruling spawned a large, grass roots contractor organisation, the Professional Contractors Group which has campaigned against IR35 since 1999. IR35 pushed a lot of highly skilled professional contractors out of the UK.

IR35 was a bit like the mess Australia had before the PSI laws but not as bad as the new Sherry/Henry endorsed recommendations.

Over time in the UK both the Conservative Party and Liberal Democrats moved into this constituency space. Now, as the coalition government, they have made the following undertaking. To, "Review IR35 as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility."

IR35 had heavy impact on highly skilled information technology specialist in the UK. Anyone anywhere near this labour market knows that it's globally mobile and competitive. People with the skills shop globally and their tax treatment is important to where they choose to work.

Two years ago the Rudd government brought a UK labour specialist out to Australia who recommended the government substantially dump the use of IT contractors and force them to become public service employees.

The Gershon Report, which has been implemented, claimed the government could buy these IT technical skills cheaper by turning contractors into public servants.

My sources in the IT sector tell me there's currently a significant IT specialist shortage in Australia.

Maybe there's a lesson for government. When a labour market becomes a genuine 'market', government manipulation either of tax or labour choices always has consequences, sometimes economic, sometimes political.


From the Business Spectator, June 2010.

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