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Wednesday, 21 June 2000
Page: 15306


Senator SHERRY (12:15 PM) —I should make the point that we should have been dealing with the Indirect Tax Legislation Amendment Bill 2000 which deals with 145 amendments to the government's GST package, but that has been put off because of the current division and shambles in the government. I will not use the word `coalition'; it is a sensitive description that the National Party are concerned about, but there is considerable division, confusion and criticism amongst the ranks of the Liberal and National parties concerning that piece of legislation because it goes to the issue of rents in caravan parks and hostels. We have seen some recent developments following, at last, the release by the Treasurer of the report into the impact of the GST on rents and caravan parks. I say `at last' because the Treasurer has been covering up that report for the last six months until at least parts of it were leaked earlier this week. But we will come back to that legislation in due course.

The Democrats requested it be pulled, and it will be interesting to see whether the Democrats are any more successful than the National Party, after their failed attempts to date to redress the concerns of the people who reside in caravan parks. I notice my colleagues Senator Boswell and Senator McGauran are in the Senate, and I hope they are listening. It will be interesting to see whether the government take any notice of your concerns in this area. They have so far ignored, quite contemptuously, your requests to deal with the issue of caravan park residents. It will be interesting to see whether the Australian Democrats have any more clout than you have. But, anyway, we will come back to that legislation shortly.

In respect of the New Business Tax System (Alienation of Personal Services Income) Bill 2000, I think it is important to outline some background about the alienation of personal income. It might not be a description that is well known to those who may be listening to this debate, and I think it is important to look at the issue in context by firstly defining the problems in this area. It refers to a situation where a person is able to have amounts for their personal exertion that would otherwise be subject to normal employee tax arrangements paid to another entity such as a company or a partnership. Such an arrangement is used to gain tax advantages—principally income splitting and larger deductions—that are not available to an employee taxed under the normal employee PAYE or, from 1 July, PAYG arrangements.

This issue was examined in some detail in the Review of Business Taxation, which is known as the Ralph report. In that document, it was found that the number of owner-managers of incorporated businesses increased by more than 400 per cent, while the number of self-employed and all employed increased by only 50 per cent. So there has been an explosion in growth in this particular area. The report did recognise that there were factors other than taxation arrangements which contributed to growth in the proportion of owner-operator businesses. There are certain structural changes occurring to the economy, particularly the growth in the services sector, that are driving this in part. The report considered that the area had implications for the integrity of the taxation system. That required a thorough overhaul in an attempt to at least rectify the loss to revenue of the growth in the number of these arrangements.

There are a number of reasons other than taxation implications for a person to operate as an interposed entity. Some of them are, to some extent, what I would describe as jargon: we have assertions about greater freedom of negotiation, less restriction on how work is to be performed, ability to seek a wider range of work and meeting various enterprise demands for greater non-employee input. That is the jargon explanation for this government's desire to eradicate unions from the workplace and the protective role that they play in ensuring that employees receive a fair go in respect of their treatment by employers.

Under current tax law, a person will be taxed as an employee where a common law employee relationship exists. The test for this deals with how a number of matters apply to the relationship, including what is known as the control test exercised by the employer. In circumstances other than a common law employment relationship, the general anti-avoidance rules contained in part IVA of the Income Tax Assessment Act 1936 must be used to apply employee tax arrangements. While rulings may be made outlining the conditions when the commissioner considers part IVA applies, its application and enforcement often involve the examination of individual cases to determine if a case can be made out for that part to apply. Of course, there is a practical difficulty here with the examination of what would literally be hundreds of thousands of individual cases and the individual circumstances that need to be examined to carry out the fundamental test to determine whether someone is an employee or what is known as an independent contractor.

There are a number of major tax advantages that can be gained by what is known as alienating personal income. They were examined closely in the Ralph report. I will not go into all the detail here, but the first is income splitting. This allows an amount received to be split amongst two or more people, often immediate family members. Obviously, this is not normally available to a person paying PAYE tax in a traditional employer-employee relationship. There are advantages of greater deductions and the deferral of tax. Where a company is used as an interposed entity, profits can be retained in the company at times when their distribution would result in a higher marginal rate of tax being paid if profits were immediately distributed.

There was one other area that the Ralph report did not look at in any great detail, and it is disappointing that this was not examined more closely. Whilst the Ralph committee looked at the advantages to people who have been able to enter into arrangements, such as companies, and change their tax arrangements to their advantage, it did not look in any great detail at the role of the employer in these sorts of arrangements. There is no doubt that some employers at least are entering into contrived or artificial arrangements in respect of what have traditionally been regarded as employees. It is not just a matter of employers seeking to avoid what they would regard as burdensome paperwork requirements in respect of the employment of labour; there are significant advantages to the employer in terms of avoiding workers compensation costs and superannuation guarantee contributions.

This latter payment, superannuation guarantee contributions, is a very major issue in the sense that the current level of contributions is seven per cent, going to eight per cent on 1 July and nine per cent in 2001-02. The avoidance of contributions by some employers in this area has a very significant impact on the long-term retirement incomes policy of this country, particularly at a time when the ageing population, as it is known, will increase from about 12 per cent to 22 per cent of the population over the next quarter of a century. That is another issue, another story, but it is a very important matter in relation to employer costs.

That is the background. The Ralph committee report I think did a fairly solid job in identifying the particular problems. As for the costs, the Ralph committee estimated that the arrangements I have been outlining were costing around half a billion dollars a year in tax minimisation and avoidance and that, if this particular area were not addressed, the level of avoidance would grow to around $3 billion per year. This is obviously a very substantial amount of money to be lost to our taxation system and, in addition, there is the unfairness of persons in a traditional employer-employee relationship not being able to enter into such arrangements.

The bills we are considering do lay a foundation for addressing this problem. Income will be caught and treated as the income of the individual, not the interposed entity, where an individual or an interposed entity obtains more than 80 per cent of their income from the one employer and they are not conducting a personal services business. The rules for determining `personal services business' contain three tests. If a person passes any one of these tests, they will be conducting a personal services business and, hence, not be caught by the new rules.

These are the three tests. The first is the unrelated client test. To pass this test, a person has to provide services for two or more unrelated clients during the year, and the services have to be provided as a direct result of the individual entity making public offers—for example, advertising. The second test is the employment test. To pass this test, the person has to employ an apprentice for at least half the year or employ someone who performs at least 20 per cent of the principal work of the business. It does exclude telephones and bookkeeping. For example, a computer programmer has to employ another programmer. This seems to be, I think, a reasonable test.

The third test is the business premises test. The premises must be separate from the person's home and they must be used for producing the income. Apparently, simply leasing an office is not enough if it is not used. I certainly hope that garden sheds would not suffice. But this is an area that does need, I think, some close scrutiny. The tests represent a reasonable attempt to distinguish what often is not an easy distinction to make: the difference between an employee and someone genuinely conducting a business.

However, since the government's announcement that it would accept the Ralph committee recommendations in this area, I note that our shadow Treasurer, Mr Crean, in the other place, has indicated that we will be voting for these measures on the basis that the government will introduce, in full, all the business tax changes announced—and, of course, the Treasurer has accepted these changes. The legislation we have before us does contain some important changes made since that agreement was entered into, and there are some transitional arrangements that were not mentioned by the Ralph committee or, indeed, in the Treasurer's press release of 11 November last year. These measures represent a $440 million hole in revenue projections for the financial years 2000 through to 2002, and there is a fairly minor effect in the year 2002-03.

So we have another backdown, another roll-back by this government of its initially stated intentions—and it is not an insignificant roll-back in that it is some $440 million. I note that Senator McGauran and Senator Boswell are still in the chamber, and I would just like to emphasise this point to them. Here we have this government, a government which the National Party is part of—some would say subsumed by. The National Party, as I understand it, had an interest in this matter, particularly as it concerned self-employed small business contractors, and there has been a $440 million roll-back, Senator McGauran and Senator Boswell—a $440 million roll-back.

If your government can do it in this area, why can it not do it for caravan park residents? I take this opportunity to remind Senator McGauran and Senator Boswell, who were not here when I spoke on this matter, that the government is apparently also going to accept a roll-back for the treatment of artists and the way their income is included for the purposes of the business tax package.


Senator Boswell —Good minister.


Senator SHERRY —You compliment the minister, Senator Alston, for considering this roll-back. I think it is perfectly justifiable that artists have been arguing about the way they will be taxed. If the National Party and the Liberal Party can agree to roll it back for artists, why are they not doing it for caravan park residents? I think Senator McGauran and Senator Boswell will struggle when caravan park residents say, `You did roll it back by $440 million for self-employed contractors. It was rolled back in respect of artists. Why isn't anything being done for caravan park residents?' I think you would have a problem justifying the position of the government in this area, given the roll-backs that have occurred in recent times. I understand that you are now going to use the name `National Party' instead of `coalition'. I think you need a good deal more than that to extract yourself from the current difficulties.


Senator O'Brien —Brand identification.


Senator SHERRY —Brand identification is right, Senator O'Brien. `Coalition' apparently does not go down well in rural and regional Australia. I do not think `National Party' would go down any better in the current environment. That is another issue.

I understand that we will support the legislation. It represents an attempt to deal with the problems of tax minimisation and evasion that have occurred in this area. This has been a significant area of growth in tax minimisation and evasion. It has been much more significant than it should have been. It is good to see changes in this area, although there has been a $440 million additional cost to revenue as a result of the changes that the government has backed down on. It is at least some advance in this area.

I conclude my remarks by saying that, in terms of fairness and equity in the tax system, it is not fair that the considerable majority of employees in this country, PAYE taxpayers, who, because of the nature of the law quite rightly in this country, are not able to take advantage of some of the matters that I referred to earlier and other people in similar working situations are able to take advantage of them. That effectively shifts part of the tax burden back onto PAYE taxpayers. There is clearly a need to deal with this issue effectively. I am pleased that this legislation at least goes some way towards attempting to deal with these problems.