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Follow-up Submission to Victorian Owner-Drivers Inquiry
18 October 2004
The following submission was made in response to questions raised by Industrial Relations Victoria after ICA made its first submission in June 2004.
To access ICA's original submission, click here.
1. Further information about Independent Contractors of Australia (ICA)
a) We are pleased that you found our Website of assistance and would be happy for our material to be quoted in your Review report.
b) ICA's registered address is 928 Northeast Rd Modbury Heights SA, 5029. Full details of ICA's relevant registrations are available on our Website under "What/Who is ICA?" located near the top of the left-hand column.
c) ICA has several hundred subscribers and several thousand registrants on our database.
d) ICA does not collate data on the professional backgrounds of subscribers and registrants.
e) ICA is networked with the Courier and Taxi Truck Association of NSW, the National Independent Couriers Association in Victoria, as well as WA and Queensland courier groups.
2. Further information about the incorporation of owner-drivers
The issues and decisions to be made by independent contractors (owner-drivers) on incorporation constitute one of those areas which is broadly generic, no matter in which industry an individual may happen to work. It is important to note that, over the last decade, changes to directors' liability and to income tax regimes have substantially altered the circumstances surrounding incorporation for independent contractors. It is the experience of ICA, however, that the advice often given by accountants, solicitors and head contractors/clients to independent contractors---namely, that incorporation should occur---may not be necessary or advisable. Such advice frequently fails to take into account new tax and legal regimes. Views on the accuracy of this perspective may vary.
We address the issues you have raised as follows:
a. Income tax withholding. It was once considered that incorporation created opportunities to avoid withholding obligations, under PAYE. The withholding tax reforms of 2000 under PAYG, however, were designed to (and have created) a catch-all system for withholding. Whether an independent contractor is incorporated or unincorporated is of no consequence to withholding obligations, apart from some variations in administration.
b. Business tax deductions. It was once considered that incorporation created opportunities for independent contractors to access higher levels of tax deductions than were available to employees. ICA has always been sceptical of this view, which was re-inforced by the results of the only significant and authoritative research undertaken on the issue.
An audit by the Australian Taxation Office conducted in 1997 and 1998 covered 65,000 taxpayers profiled as likely income-splitters. The results, however, showed that the tax adjustments required were of a lower incidence than generally expected in any general tax audit.
In general, where independent contractors gain access to additional tax deductions, this is normally the result of genuine expenses related to their business operations. Nonetheless, the debate about income-splitting, business tax deductions and profit retention issues continued for some time up to the introduction of the Personal Services Income legislation, passed in September 2001. ICA was heavily involved in this debate and had significant input into PSI policy considerations.
Our experience is that considerable confusion exists in the accountancy and independent contractor communities over the facts of PSI.
Since mid-2003, ICA has, with the assistance of the ATO, developed a PSI layperson's explanation. The final document (with ATO Website links) was placed on ICA's Website in early October 2004. ICA takes the view that business tax deduction issues are now relatively clear for both incorporated and unincorporated owner-drivers.
If owner-drivers incorporate and seek to split income or retain profit, however, they may be subject to the catch-all anti-avoidance provisions (Part IVA) of the Tax Act. These provisions are undergoing a judicial testing programme by the ATO. Owner-drivers should be aware of the potential, retrospective application of Part IVA. It may be some years before the judicial testing programme has clarified the situation.
c. Family trusts & employment of family members. This directly relates to the income-splitting issue. ICA's observation of legal test cases is that, where a family member has genuinely worked in the operation of the business, the courts have supported payments to family members as legitimate business-tax deductions. This can, however, be an area of uncertainty given the ATO test cases mentioned above. Owner-drivers should be aware of the potential risk, particularly if payments to a family member or trust have not been made with clear evidence of the work being performed.
d. Liability issues & personal guarantees. Incorporation is often recommended on the basis that it protects personal assets. Even though this may still be relevant, ICA takes the view that developments in the legislation dealing with of directors' liabilities over the last decade have meant that personal assets can still be garnished---particularly in the event of fraud and/or breach of company law. ICA's understanding, particularly with the owner-driver sector where leasing or loans are being sought and an independent contractor is incorporated, is that lenders generally require personal guarantees, thereby negating the asset-protection aspects of incorporation.
e. Insolvency situations & trading terms. ICA was invited to, and made a submission to, the Senate Select inquiry into insolvency laws. The submission is available on our Website. In that submission we made the point that independent contractors are most frequently unsecured creditors when faced with the insolvency of a client. This applies whether the contractor is incorporated or not. ICA believes that owner-drivers should only provide credit with great caution. The best credit is no credit, and a client that does not pay is not a client but rather a liability. ICA believes that owner-drivers should only agree to trading terms consistent with quick administrative handling of their invoices.
As detailed in our initial submission to your review, ICA would support consideration of an extension of the Small Business Commissioner's jurisdiction to assist with quick and speedy resolution of payment/contract disputes.
f. Compliance with company regulations. This is an onerous burden for owner-drivers who choose to incorporate. Once incorporated, an independent contractor must produce company and personal tax returns, thereby increasing annual bookkeeping and accountancy costs. Legal fees to achieve incorporation will normally be of $1,000 plus and annual statutory reporting requirements for incorporated small entities are around $200 plus accounting fees. For many owner-drivers these fees may be considerable. Owner drivers should carefully assess these additional costs before incorporating.
g. Superannuation guarantee payments. SGA obligations are legislatively the same as the old PAYE withholding arrangements. If an owner-driver is unincorporated, SGA does not strictly apply. If an owner driver is incorporated, SGA does apply because the owner-driver is an employee/director of her/his structured entity. ICA's observation of the transport industry, however, is that, subsequent to the Hollis (Vabu) High Court decision, the ATO has taken the view that SGA applies to all owner-drivers---irrespective of incorporation---and in particular for bicycle couriers. The transport industry appears to have largely followed the ATO's view post-Hollis.
h. Is incorporation required/encouraged by consignors or head contractors? ICA's observation is that incorporation of owner-drivers is often required or encouraged by head contractors and that this may lead to a higher level of incorporation than is actually necessary in the transport sector. The reasons for this are historical and relate to concerns held by head contractors about their statutory liabilities.
Under PAYE, incorporation made it clear that the owner-driver was responsible for withholding obligations. Under PAYG, clarity exists whether owner-drivers are incorporated or not. Head contractors, however, generally haven't accommodated the new realities of PAYG in their thinking.
The Hollis (Vabu) case has probably encouraged more incorporation. During the 1970s--1990s there was considerable confusion in the transport sector about the common-law indicia for owner-drivers. In fact, it was common for industrial instruments to include clauses covering owner-drivers which created considerable jurisdictional confusion. This also appeared to create a strong belief among head contractors that incorporation was necessary for the independent contractor status of owner-drivers to be clear. The Mayne Nickless case (2000, discussed on ICA Website here) in which an owner-driver was found to be an employee based on poor application of common-law indicia, probably highlighted the managerial errors being made in the transport sector. Since the Mayne Nickless case, there is some anecdotal evidence that head contractors are more aware of the common-law requirements than they were in the past. Whether this has led head contractors to be less insistent on the 'need' to incorporate is difficult to assess.
However, where owner-drivers are encouraged to incorporate, this is probably done to provide some insulation from being classified as an employee. Incorporation is probably considered to create greater clarity with regard to tax, superannuation, workers' compensation, annual/long service/sick leave and union membership. Owner-drivers are also considered to have greater customer focus, to be more productive than employees and hence more cost-efficient (due to higher productivity) than employees.
i. Accounting advice. ICA's experience suggests that the most general accounting advice given to independent contractors (including owner-drivers) is that a company structure is preferable to being a sole trader. ICA believes that this advice may often reflect legal and tax circumstances that have been superseded over the last decade, particularly given developments with PAYG and PSI mentioned above.
j. Tax advantages. Typically, incorporation for owner-drivers may involve up-front legal fees exceeding $1,500 and additional accounting/booking keeping costs and ASIC charges per annum of around $2,000. Given these anticipated costs, the tax advantages to an owner-driver as opposed to being a sole trader need to be substantial to warrant incorporation. Given that legitimate business expenses are allowed to an owner-driver either as a sole trader or as an incorporated entity (see ICA's recent PSI explanation here), it can reasonably be inferred that an owner-driver needs to be grossing in the order of $150,000 a year to warrant incorporation and the corporate tax regimes that go with it. Views on the actual figure will vary substantially.
k. ICA's view on incorporation. ICA does not provide financial advice. ICA's focus is on assisting independent contractors (owner-drivers) to arm themselves, easily and readily, with accurate information upon which they can make their choices. There is considerable 'advice' available that often appears more in line with the business needs of the advice-giver than the needs of the advice-receiver. Owner-drivers are genuine business people and are liable for their business decisions. What they need is access to accurate information. Further, there is no single answer to the question on incorporation. Owner-drivers face a wide variety of circumstances, for example:
a semi-retired person working for short periods;
a family or several people jointly owning a vehicle and sharing the work, keeping the vehicle (asset) working as consistently as possible;
young people working long hours to give themselves a kick start in their finances;
individuals who have other income-earning assets and yet others who have no other income-earning assets.
The list can go on.
What is important is that each individual fully assesses his or her own circumstances, has access to quality information and is free to make decisions based on the outcomes that will best suit his or her circumstances.
l. ICA's view on public policy. Within the context of the circumstances described above, ICA believes that public policy should look to achieve the specific outcomes targeted under each policy regime. In other words, the tax system, for example, should focus on maintaining the integrity and effectiveness of the tax system and not be straddled with other possibly conflicting objectives. The same for occupational health and safety regimes and so on. In pursuing their proper objectives, individual policy regimes should also seek policy neutrality with respect to an individuals' legal status---ie, whether they are an employee, self-employed independent contractor, incorporated, unincorporated or trust or other.
In short, public policy regimes should avoid skewing people's preferences about which form of engagement they should choose.
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