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

CHAIR —I welcome the representatives of the Australian Contract Professions Management Association and the IT Contract and Recruitment Association. Mr Thomas, do you wish to make an opening statement?

Mr Thomas —Thank you. I will start off by thanking you for the opportunity to address the committee today. I speak as chairman of this association, but I have also been asked by Mr Robert Drury, the executive director of the Australian Information Industry Association—which has very similar views to us—to speak on their behalf as well. My personal background is that I have 30 years information technology experience, both as a business person and as an IT contractor, and obviously an accounting-type background.

Let me just open up by saying that Australia desperately needs IT specialists. In the information technology area we are in desperate need of this. We currently have a net outflow as more Australian IT specialists are leaving the country than we are able to train, for various reasons—primarily that they are getting more money overseas and there are better tax regimes overseas for them when they are working there. We also need an ability to attract overseas contractors into this country because a key issue is to get them in to build our infrastructure and also to get the skills transfer from overseas where most of this technology comes from.

The local guys are moving out and we need to attract the overseas people. The overseas people primarily are attracted to this by lifestyle. These people generally cannot work in a permanent position in this country, because of the laws of employment, and quite often they are only here for a limited period and cannot take long term permanent jobs. They need to operate as contractors—and do operate as contractors—in this country. The other thing that it is very important to understand is that the whole of the IT industry is project driven: we go out and bid on a project, we win the project and then we have to get people to fulfil the needs of that project. So it is project-driven and quite often we will need contractors to work on those particular projects. The use of contractors in the computer industry is the essence of the labour of that industry, particularly specialist-type people whose skills are very, very highly regarded. They are highly paid in return for those skills and they operate at their own risk generally—they do not have long service leave or leave or anything. They operate as contractors, that is how they go.

Our association represents several firms of accountants: what we call management-type agencies. These IT specialists are specifically IT specialists. We quite often refer to them, in jest, as `propeller heads'. They are very, very good in the areas that they operate, but they are not accountants. We fulfil the back end and we assist them with their tax legislation. Obviously we pay them tax effectively, as best we can, and we ensure that they work within the laws of the countries in which they operate. Our particular organisation also has been instrumental in making sure that a lot of Australian tax is paid for overseas contractors who work in this country, as this previously had been flowing out of the country.

I guess that is why we formed the association. The word `Australian' was not lightly chosen when we took the name the Australian Contract Professions Management Association: those organisations invited to join our association are Australian companies principally. That is where we are coming from. We support the collection of taxes and we support the principle of the alienation of income. Where we do have a lot of difficulty is outlined in our submission so I am not going to cover that today. Essentially, all we are seeking today is equal and fair treatment for contractors at large, specifically for IT contractors, and what we are specifically asking is that they be allowed to claim the same expenses and receive the same fringe benefits as any employee of any other normal organisation. We are not asking for any special treatment here, we are just asking for a level playing field.

I would point out that when the alienation of personal services income tax changes were first suggested, back in 1998-99 in fact sheet 19/703, they clearly said that this would treat all people, including contractors, consistent with other tax law rulings and they would provide fringe benefits tax to the individuals providing the personal services, provided no material taxation benefit was gained. So there they said that fringe benefits tax and normal expenses would be claimable. When the legislation was actually released and we had a view of it that had been specifically included and has legislated against a lot of the expense claims and fringe benefits tax. All we are asking for a fair and level playing field to enable us to attract overseas expertise into this country.

CHAIR —Thank you, Mr Thomas. Ms Moon, do you want to make an opening statement for your association?

Ms Moon —Maybe I could just open up by saying that while I am the president of the Information Technology Contract and Recruitment Association, I am also the managing partner for one of the five largest information technology recruitment companies in Australia, so I come to the association with that background. Certainly, the shortage of IT skills and the fact that Australia is trying to encourage new and small business development in the IT industry means that a lot of those organisations turn to contractors to find the skills base that they need.

The issue that the association would like to bring to the attention of the committee is section 87-20, paragraph 2, which in fact changes the operation of the agencies within the labour market. To date, in a single year contractors have been able to register with multiple agencies-and in fact work through multiple agencies-thus satisfying the 80-20 ruling. That clause now changes the operation and would force independent contractors to seek work outside of the agencies. That will have an impact, of course, on those businesses, small and large, which run agency services or provide personnel resourcing services to the labour market and will also force independent contractors to go market themselves, whereas previously they been able to be fully employed because the agencies had been finding the work for them. So it has an impact on people looking for work, and I guess from Australian point of view we really want to keep all of the IT people fully employed and not have them out marketing their services. It also has a direct impact on the agencies themselves in terms of taking away for part of the year the opportunity for them to place people and receive the revenue for that.

CHAIR —Thank you. Are there any questions?

Senator WATSON —Does your agency actually pay the people or does it just send -

Ms Moon —Yes.

Senator WATSON —You actually pay the people?

Ms Moon —Yes.

Senator WATSON —And then you charge the firm out at a contract rate, do you?

Ms Moon —Yes. The agencies are actually the deemed employer of the contractor. We have almost a thousand contractors working for us. Not all of those are independent contractors, some are PAYG. We pay all of those contractors and we are their deemed employer. We collect all the relevant taxes, payroll tax and superannuation that we are meant to for those people and we charge the clients a fee for placing those people and managing them during the project.

Senator WATSON —So effectively there is something of a distinction there, is there not, in that you actually pay the employee and then charge them out at a particular rate?

Ms Moon —The contractors work on a contract basis to the agency, but under all of the jurisdictions,both state and federal, the agency is the deemed employer for the person, even though they are not actually an employee of the agency. I guess that is why the clause causes some concern, because in fact what it does is to say, `For the 250 information technology agencies across Australia -

Senator WATSON —It would not only be information technology.

Ms Moon —No, of course not.

Senator WATSON —It could be engineering skills et cetera.

Ms Moon —That is correct, Senator. I am here to represent the agencies who work in that specific area but your assessment is correct.

CHAIR —Ms Moon, in your submission you have made a suggested amendment. Have you made that direct to the department or the Treasurer?

Ms Moon —Yes, the submission has gone to Treasury. It went to the Treasurer, to Minister Reith and to Minister Alston as well.

CHAIR —Thank you. Are there any other questions, senators?

Senator MURRAY —Firstly, that `propeller head' thing amused me. I have never heard your people described as propeller heads; what does it mean?

Mr Thomas —That they are technically very intelligent but not necessarily commercially smart. They are very, very good in the area that they work.

Mr Mudge —They are good at what they do but they do not have the business savvy to arrange their affairs. The money that they get they usually squander on stuff that we will not discuss today!

Senator MURRAY —I can see a new form of abuse occurring in the Senate. In the first paragraph on page two of your submission, Mr Thomas, you said a number of interesting things and I would just like to ask you about it. First of all you have said, `as a result of the industrial relations push for enterprise agreements.' Enterprise agreements are collective agreements. Did you mean `enterprise' or did you mean `individual'?

Mr Thomas —I was referring to the encouraging of enterprise agreements, which are the agreements between enterprises and individuals. What that has done in our industry, and many industries -

Senator MURRAY —In IR law that is an individual agreement.

Mr Thomas —An individual agreement. Okay, it was obviously the wrong terminology. Thank you for that amendment.

Senator MURRAY —I understand what you mean. You then go on to say, `IT professionals and other executives have been forced out'. Now, `forced' means it is not voluntary. Forced would mean those people would rather have stayed in, which means they would rather have been employees. The purpose of this legislation is to try and identify those who are employees by any other name. Are you therefore conceding that many of the people who work in the industry are employees by any other name?

Mr Thomas —Yes and no. Many of the people are contractors not of their own choice. I can quote a very good example that I was personally involved in and that was the toecutting exercise in Telstra in the early nineties when Telstra undertook to reduce their staff from 90,000 to 60,000 over a three-year period. A lot of those people were offered redundancies and pay-outs to take early termination and so on. A lot of the smart guys took an early redundancy and actually ended up contracting back to the organisation. Many of them would have preferred to have remained employees of Telstra. As John pointed out, a lot of these people are not capable of running their own businesses and do not wish to run their own businesses but have been forced into the contracting arena.

Senator MURRAY —So your word `forced' is deliberate?

Mr Thomas —Yes, absolutely.

Senator MURRAY —You make a very clear point on fringe benefits. Your point, as I understand it, is that if you are to be designated an employee you should be entitled to the fringe benefits which attach to being designated an employee and if you are to be classified a business you are entitled to the deductions and to whatever fringe benefit laws apply to businesses. That is correct, is it not?

Mr Thomas —That is correct, yes.

Mr Mudge —To make those fringe benefits which are ordinarily available to current employees who are not contractors available to employees who might be subject to the measures.

Senator MURRAY —You do say the measure is silent on the issue of fringe benefits. Our normal assumption is the law would apply as it is, but I presume you would like us to clarify that from the tax office?

Mr Thomas —Absolutely, because the argument we have with that is, as I mentioned in my introduction, the original fact sheet. On the bottom of page 2 of my submission I mention that the initial fact sheet did mention specifically that fringe benefits would be payable to those kind of contract-type staff, but in the actual legislation there is no mention of it. Conversely, in the legislation there is mention of restricting the types of expenses they are allowed to claim. Just to take a very simple example, a contractor's tools of his trade would quite often be his laptop and a mobile phone. As this legislation is written now you cannot do a company reimbursement on a laptop and a mobile phone, which are absolutely essential tools of the trade, because of the limitation of the expenses within that personal services entity.

Mr Mudge —We did ring a section of the Australian Taxation Office—I think it was called the Alienation of Personal Services Centre of Excellence—and we did pose a question on the availability of fringe benefits under the new measures. We were told that fringe benefits would not be available under the new measures from 1 July 2000. We were told that it would be, and I quote `the end of salary packaging as we know it, full stop'.

Senator MURRAY —Yes, but that had a different motive than what we are after here. Let us contrast the position of an IT professional with a private user like myself. If I buy a computer and software I keep them for a long time because I do not have high tech needs. I assume an IT professional needs to constantly upgrade and change their hardware and their software and therefore there is a high cost attached to that?

Mr Thomas —Absolutely, and if you are a normal employee you are able to actually replace a laptop—which is the most essential tool of the trade—annually and get a tax concession for that, which is as it should be, there is no problem with that. However, under this new legislation an IT contractor, as a personal services entity, would not be able to do that.

Senator MURRAY —Would you be able to give us an estimate of what a typical IT professional would need to spend annually on hardware and software to keep themselves current?

Mr Thomas —Off the top of my head it would certainly be of the order of $10,000. It is not mega dollars, but it is significant.

Senator MURRAY —So if they were not able to claim it and they were operating at the top marginal rate they would virtually have to earn $20,000 more to cover that.

Mr Thomas —Yes. I think the previous presenters also mentioned this, but our perception is that, whether we like it or not, the GST will push prices up. The contractor wants to earn his dollar and the end user does not want to pay the higher dollar that includes the GST. There is going to be some kind of rationalisation there but there will be a slight movement up. If we start excluding all these expenses and other benefits that the guy would have been able to get under the old legislation, he is going to have to earn that much more and hence force the prices up even further again.

Senator MURRAY —Ms Moon, in your introductory remarks you referred to 87-20. You indicated the contractor may undertake work for three unrelated employment agencies and derive one-third of their annual income from each and they would not satisfy the unrelated clients test. Are they any different to, say, a casual or a part-timer doing normal work who ends up at the moment with three group certificates because three agencies might call them up to do nursing work at homes or cleaning work or something of that sort? What is the difference?

Ms Moon —The contractors would obviously have their resumes with a number of organisations who seek work from the agencies. Under the current 80-20 ruling the contractors are able to work through three agencies to fulfil the obligations under 80-20 and to find employment. As we understand it, under the new legislation the agencies are almost treated as a single employer group so the contractor would be forced to seek employment outside the agencies.

Senator MURRAY —That is if they wanted to be classified as a contractor, but the intention of the legislation is to classify those who are really in employment relationships as employees and then they can get the appropriate deductions that go with that. That is really my question. At the moment you have people who get three or more group certificates because they work for three or more employers and are employees of each of those. Why would it not be the same for IT?

Ms Moon —The information technology industry tends to run on a project basis. After the downsizing during the late eighties and early nineties a number of organisations moved to retain a core of skills within their own companies and then to contract out for the skills required for specific projects. One of the reasons for doing that is that the skills required change. You would all be aware that during the lead up to the Y2K changes for 1 January 2000 the key skills that were needed were some of the old mainframe skills, the IBM architecture skills, CICS Cobol type skills. Now we are in a completely different environment and we are looking for e-commerce skills, we are looking for Java skills, we are looking for the new media skills. So a number of organisations choose not to hold the core or the very specific technical skills within their own organisation but to seek them in the market place. This enables them to move faster in a global environment to meet their needs.

Senator MURRAY —But that is not entirely true, surely, because is it not so that very large numbers of IT professionals are not involved in project work but are involved in continuous work, namely, maintenance? They are problem solvers, they are called in to review and appraise systems and to deal with systems' failures. There is ongoing operational work, if you like. Now, in the Telstra example that you gave earlier, surely those persons would typically be employees by any other name.

Ms Moon —Not all of the IT contracting work force are independent contractors. About 50 to 60 per cent would currently fall under the pay as you go taxation system. Those who are independent contractors tend to be the ones who work on a project basis, and whose average length of project would be somewhere between three to nine months maybe . Very seldom is it 12 months for an independent contractor.

Senator MURRAY —Thank you, Ms Moon.

Mr Thomas —Can I address that? I certainly agree with what Sheryle was saying. Again, Telstra is a good example because the people who moved out of Telstra and into the contract market are the ones who have been brought back in to cut the new code, to do the innovative stuff-and when I say that I speak globally, not necessarily of individuals. Also, a lot of the overseas contractors that we bring into this country bring skills from overseas, like the new Java skills, the latest Oracle skills. They bring these skills into the country and we need those skills to cut the innovative stuff and to make us competitive at a world class level.

You are right in saying that there are a lot of people who maintain the existing systems. Those people are still employed by the Telstras of this world so they have the IT personnel that keep the status quo, but the innovative stuff and the stuff that gets us ahead as a nation is brought by these innovative contractors, and they are a global force, they move around the world. If there is a better deal in Singapore, they are in Singapore tomorrow, and if there is a better deal in the UK, they are in the UK tomorrow. My personal company has offices in London, Hong Kong and right around Australia. We actually track these guys all around the world for that very reason. The top skills are the ones that we are trying to get into this country to do this kind of skills transfer.

CHAIR —Can I ask how many people your two organisations represent?

Ms Moon —How many contractors or how many agencies, Senator?

CHAIR —Perhaps you might explain to us the structure of the industry, the numbers involved and how many you are representing here today.

Ms Moon —The association that I am the president of represents 15 information technology recruitment agencies who control about $740 million worth of revenue in that arena and would have probably about 12,000 contractors, only some of whom would be independent-about half perhaps will be independent contractors. The same organisations last week advertised 15,000 vacancies in the IT industry.

Mr Thomas —Our organisation, the Australian Contract Professions Management Association, would probably represent around about 10,000-12,000 IT contractors through our member companies, which at this stage are four and growing. When we speak about the Australian Information Industry Association, they represent 360 major IT companies and their estimated contractor numbers are somewhere between 25,000 and 30,000. So it is very, very significant in the IT area.

CHAIR —If there are no further questions, thank you very much for appearing before the committee this morning and thank you for your submission.

Mr Thomas —Thank you for the opportunity.

[9.56 a.m.]