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New Business Tax System (Alienation of Personal Services Income) Bill 2000 and two related bills

CHAIR —I call the committee to order. Just before we start, I remind all senators that, with regard to publication of the submissions to this inquiry, unless there is any objection we shall move that they be published. Is everyone in agreement with that? Thank you. This morning the committee is considering the New Business Tax System (Alienation of Personal Services Income) Bill 2000 and two related bills. The committee's scheduled reporting date is 5 June. This is a public hearing and as such all members of the public are welcome to attend.

Before we commence taking evidence, I wish to state for the record that all witnesses appearing before the committee are protected by parliamentary privilege with respect to evidence provided. Parliamentary privilege refers to the special rights and immunities attached to the parliament, its members and others necessary for the discharge of the parliamentary functions without obstruction and fear of prosecution. Any act by any person which operates to the disadvantage of a witness on account of evidence given by him or her before the Senate or any of its committees is treated as a breach of privilege.

I now welcome the representatives of the Master Builders Association. Do you have a short opening statement to make?

Mr Murray —I do, yes. We certainly appreciate the opportunity to appear before the Senate committee. I want to make some general observations on the legislation and perhaps make some very brief reference to the specific or more salient aspects that were set out in our written submission. Our organisation looks after the master builder movement and collectively represents the interests of 20,000 businesses. We operate both in the housing and in the non-residential sectors. As senators would know, ours is a very large industry, contributing in excess of $50 billionannually to the nation's GDP and employing just under 700,000 people. It is, however, an industry that is dominated by small businesses, particularly micro businesses.

There are good reasons for this small business make-up. This is an industry that is susceptible to business cycles and this fluctuating activity provides limited scope for a permanent employer/employee relationship. With so much volatility, employers need to adopt systems and procedures that make them more competitive and that explains why there has been a growing shift towards the subcontract system. That is not to say, however, that the evolution of these arrangements are undesirable. Indeed, independent studies have demonstrated that not only does the subcontract system produce greater efficiencies for the overall market, it also provides contractors with a greater return than they would have received had they operated as employees.

This also does not mean that those businesses are not meeting their tax obligations. Our organisation believes that genuine contractors should be treated exactly the same under the nation's tax system, regardless of their size. It is not open for government or unions to say that such contractors should become employees because more tax would be collected or union membership would be larger. In a free country what is important is choice: it is up to the person to choose whether he or she wishes to be an employee or contractor tradesperson. However, a person should not cheat on the system. Sham arrangements should not be supported and our organisation is implacably opposed to sham arrangements. The AustralianTaxation Office should enforce the legislation against those who set up such arrangements. If such enforcement does not occur, or to do so is too difficult, governments should not adopt practices or enact legislation that snuffs out the free enterprise spirit or convert legitimate businesses and treat them for income purposes as if they are employees.

This is what this legislation seeks to do and that is why we are opposed to it. A person is either an employee or not and a business is either a business or it is not. If a person is conducting himself as a business, he should not be treated as if he were an employee. The fundamental difficulty we have with the legislation is that it accepts that a genuine independent contractor relationship exists, but then seeks to impose specific tests and if the business does meet those tests requires the income to be treated as if the business arrangements are not legitimate. This is our position and I have deliberately laboured that particular point because there are some who have said that the position that I have articulated is not so and that we have somehow shilly-shallied on this matter because we are either close to the unions or whatever. This is not so.

All that said, the MBA recognises political reality. It does not mean that we support the actions that the politicians are taking, or intending to take, but we must recognise that at the end of the day a piece of legislation specifically dealing with this issue is on the table. It is our obligation and our duty to analyse that and we have sought to do that in our written submission in the context of how it applies to our industry. In the context of time, I do not know whether you want me to identify specific aspects of the written submission or whether you would want me to assume that it is taken as read.

CHAIR —Mr Murray, we have a very tight schedule this morning so perhaps we will just leave it to arise in questions. I will now open the hearing to questions.

Senator WATSON —Last time we had some renovations done we noted that employees of the carpenter actually provided their saws and that sort of thing, so in a sense are there loopholes in the law? The law provides that employees operating in the building industry who are required to produce a result and supply their own tools or equipment are liable. This tends to suggest that maybe these sort of people could also be contractors because they provide their own tools. Is that the practice still in the trades?

Mr Grinsell-Jones —Well, employees do provide their own tools and if they are employees then they are paid a tool allowance which compensates them for the cost of tools.

Senator WATSON —But according to this legislation they might be able to slip through the net.

Mr Grinsell-Jones —No, because it is a three part test: they have to be paid for a result, they have to supply their own tools and they have to be responsible for rectification. I would have thought in the example that you have outlined that it is the major contractor who has the contract with the house owner to do the renovations who is paid for the result, then out of that money they pay the employee, and who is the person responsible for rectification. On our reading of it, merely providing tools does not bring you under that test.

Senator MURRAY —Mr Murray, you say you represent over 21,000 businesses. Do you know roughly how many businesses there are in the industry?

Mr Murray —In the building industry?

Senator MURRAY —Yes.

Mr Murray —The ABS studies have indicated there are just under 200,000.

Senator MURRAY —So you have about a 10 per cent coverage. You cover pretty well all the majors, do you not?

Mr Murray —The structure of the industry being what it is, our thrust is in terms of covering the builders as such—we are a building organisation. There are many independent micro businesses who perform functions as independent contractors and they are regarded as businesses and treated so under the ABS and the tax office.

Senator MURRAY —You probably have not had the opportunity to see the HIA submission, although I think it is now public. They welcome the legislation in its modified form. Why would the two of you differ in your views?

Mr Murray —As I indicated in my opening statement, we start from the premise that a particular entity is either a business or is not a business. The common law has over the past decade - indeed over the last century - evolved various tests to distinguish between who is a contractor and who is an employee.

Senator MURRAY —But they are an employers' representative; why would they be more amenable to the bill? They have the same problems that you have, surely?

Mr Murray —We start from the premise that at the end of the day this particular legislation assumes that certain businesses are operating legitimately and then imposes certain tests which, as I indicated, if those legitimate businesses do not pass deems them, at least for income tax purposes, to be operating illegitimately.

Senator MURRAY —Would you concede that difficulty you see for your own industry in the legislation would apply to other industries, for example, the cleaning industry and the transport industry?

Mr Murray —We would say it would. The principles that I outlined in my opening statements are general philosophical principles. We do not believe that this legislation is necessary. That said, we have examined the particular legislation but we certainly are opposed to the concept in that philosophy of enacting such a particular piece of legislation. I am not in a position to speculate as to why the Housing Industry Association have a different view.

Senator MURRAY —It is just that the government have accepted that there are persons claiming to be businesses who are not. Do you query the CFMEU figure—which is derived from the Australian Centre for Industrial Relations Research and Training—of a loss to overall tax revenue of $2.2 billion? The government believe that even under this bill they will raise—I cannot find the exact figure quickly but I think it is half a billion dollars. Do you not even concede that across the economy there is that potential tax avoidance?

Mr Murray —I think we start from the premise that the CFMEU analysis assumes that anyone on PPS should not be on PPS; that is how they arrive at their particular figures. We also start from the premise that there are many legitimate business entities operating as independent contractors who would, by virtue of this particular legislation, be converted to employees.

Senator MURRAY —My expectation is that the bill will pass - the question is on what basis - so it then comes to whether it should be amended. One of the areas you pick up on are entitlements to deductions. You say that if a business is genuinely operating as an independent contract business then the test for allowability of deductions should be the same as for all other business. You say earlier that:

Certain expenses, which may otherwise be deductible for a business, are then specifically disallowed, such as rent, mortgage interest, rates, land tax and payments to associates, except for principal work.

That is a fairly clear principle you are outlining, is it not, that if a business has allowable deductions and if the commissioner finds that a person is operating as a business they should have the same allowable deductions as anyone else? That is just a principle of equity, is it not?

Mr Murray —That is correct, but I think the legislation seeks to somehow make a distinction between those businesses which operate as personal services businesses as opposed to those which operate as independent contractor businesses. We fail to understand the distinction between the two because at the end of the day you are either conducting a business or you are not conducting a business.

Senator MURRAY —This would be an area of questioning you would like us to explore with the government when they appear before us; is that not so?

Mr Murray —We would certainly appreciate some clarification because it is a distinction that confounds us at this point in time.

Senator MURRAY —Particularly if there is no distinction in the legal entity. It is not a closed corporation, it is an individual operating a business, is that not so?

Mr Murray —Yes.

Senator MURRAY —You say that the `unrelated clients test' may make it unworkable. Do you have doubts about that?

Mr Murray —We are a bit confused with the requirement that one is able to demonstrate that the income that the contractor has derived from two or more entities is as a direct result of the business making offers or invitations to the public at large. We do not know whether that would prevent a contractor from passing the test in circumstances where the income has been derived from work so obtained through reputation or word of mouth, which is common in our industry. We do not understand this nexus for a `direct result'.

Senator MURRAY —It seems again you have your finger on a problem because it is undeniable that large numbers of contractors, consultants and so on do not advertise or offer their services in the commonly understood meaning of that. They do not appear in publications, they will operate on word of mouth or on a network basis, and with modern computer abilities networking is in fact facilitated. So it is your intention to draw attention to—

Mr Murray —We draw attention to queries that we have on that issue.

Senator MURRAY —You do accept the two-year transition period. That two-year transition period commences on 1 July 2000?

Mr Murray —I understand that to be so.

Senator MURRAY —The argument for it seems weak to me. I can certainly see the argument for a year's transition, because of the pressure the ATO is under, but by 1 July 2001 the pressure of implementing the ABN and GST system should have subsided very considerably. Why could they not pick up the pressure of administering this system from 1 July 2001?

Mr Murray —There are 140,000 people currently registered for PPS and we would anticipate a significant number of applications by those people for determinations by the Taxation Commissioner. We would expect each of those applications to be treated properly and not in a summary fashion. We are talking about a transition to a new system to take effect in five weeks time with the introduction of the GST, the abolition of PPS, the introduction of PAYG, the monthly and quarterly returns. We know—by virtue of the GST seminars that our organisation has conducted where in excess of 50,000 people have participated—that the overwhelming number of questions relate to the uncertainty that still exists in respect to the manner in which the overall raft of tax reform will impact on labour structures. So we see that there will be many applications and if the commissioner is to consider each application on its merits that is a time consuming exercise.

Senator MURRAY —But it is up to the tax office really to tell us, don't you think? If the tax office indicates they have a system of coping with it, in principle you would have no objection to there being a shorter transition time, would you, because you are just assuming they will have difficulty coping with that?

Mr Murray —We make those assumptions on the basis that we know that there are 140,000 people on PPS and we believe that the two-year period is a fair transition period and provides the industry with a reasonable breathing space in which to understand the manner in which the various tax reforms are going to apply to them.

Mr Harnisch —Could I just quickly add to John's comments. The GST might well be coming in on 1 July this year, but next year the Ralph business tax reforms—if they fully pass through the Senate - will also come in. That will certainly also impact on small businesses, including subcontractors. So they are going to be busy not only taking a breather from the GST but also having to cope with the new wave of reforms on 1 July 2001.

Senator MURRAY —You and I both know they are not going to breathe easily for a few years. I have one last question. One of the suggestions made to us is that the Victorian payroll tax legislation test should be adopted in place of the three personal services business test. Are you familiar with the Victorian payroll tax legislation test for classifying a business?

Mr Grinsell-Jones —Generally familiar. They were the ones recommended by the Ralph committee initially, as I understand it. Our view is that they are very loose; in fact, they are designed more to test whether a person is an employee or an independent contractor and would be more relevant to that type of test. In effect, this legislation has already passed that step by presuming that people are not employees and are genuine independent contractors.

Senator MURRAY —Has your industry had difficulty in complying with the Victorian payroll tax legislation test? Has it been difficult to determine whether a person is an employee or not and are the persons classified as employees under the Victorian payroll tax legislation classified as businesses under the ATO legislation?

Mr Murray —I would have to consult my Victorian colleagues on that question and undertake to come back to you by the end of the week.

Senator MURRAY —That is all I have, Mr Chairman.

CHAIR —Thank you, Senator Murray.

Senator WATSON —Mr Murray, do you not think that the impact of lower personal tax rates, higher family tax concessions and the need later this year for quarterly business activity statements will lessen the reasons for people to form themselves, particularly artificially, into a subcontractor type status? I just do not think there will be the push to have this.

Mr Grinsell-Jones —That is assuming that it is for tax reasons alone that people set themselves up in business that way. That may be one reason for it but there are a whole host of other reasons.

Senator WATSON —That would take some convincing.

Mr Grinsell-Jones —The tax is an incentive, there is no doubt about that, but it is not the sole reason. There are a range of other reasons why this is the business structure that this industry has adopted.

Mr Murray —Principally related to flexibility, the ability to work one's own hours and the opportunity to earn more income than what would otherwise be the case by working greater hours.

Senator WATSON —My assessment of it is that having to complete this business activity statement on a quarterly basis, and the other two reasons, will certainly deter a lot of these sort of people who are not necessarily clerks—for example, they might have to incur additional expenses to have this work done. I just wonder whether you are pushing an issue that maybe because of the tax implications and the compliance implications over the course of time is changing the pattern.

Mr Grinsell-Jones —Our point is that tax is but one of the issues -

Senator WATSON —I can understand historically the position you come from, but I think from 1 July we will be having a new environment which your members may want to take advantage of.

Mr Grinsell-Jones —The pressure does not only come from the workers who wish to keep themselves in their own businesses; it is the entire structure within the contractual chain, which is probably going to be more driven from the top down rather than be driven from the bottom up. Even though the individual contractor may still say, `Look, I've got all this paperwork to do and it would be easier if I was an employee,' the scope just is not there in the structure of the industry to enable them to make that decision and do that that easily.

Senator WATSON —You do not think there will be a push from unions and other people to say, `Why push us into this because financially there's not going to be a lot in it for us'?

Mr Grinsell-Jones —We have no doubt there will be a push from the unions, but that will be to the detriment of the industry because it will raise prices due to the inflexibilities which are associated with employment under the award conditions, under the enterprise bargains, the patent bargains which are part and parcel of this industry.

Mr Murray —That is the essence of our philosophical statement.

CHAIR —Are there any further questions? If not, thank you very much for your submission and for appearing before us this morning and answering questions.

[9.28 a.m.]