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

CHAIR —I welcome the officers from Treasury and the Australian Taxation Office. Do you have any opening statements for the committee?

Mr G. Smith —No, we will just take questions.

CHAIR —Thank you very much. Are there any questions?

Senator CONROY —What is the estimated number of people affected by the proposals in the bill?

Mr G. Smith —The broad order is about 230,000.

Senator CONROY —It is 230,000?

Mr G. Smith —That is our estimate.

Senator CONROY —When the Treasurer originally announced his acceptance of the Ralph measures—I guess I could call it a deal between Labor and Liberal—what was the estimate of people caught under the original Ralph proposals?

Mr G. Smith —I do not have that detail here. The bill still catches or affects basically the same group of people and the revenue estimate has not really changed, other than, of course, in respect of the transitional measure—the bill still catches those people in due course.

Senator CONROY —So you are arguing that the tests that have ended up in the bill are the tests that Ralph advocated and your costings were based on the same tests that are in this bill?

Mr G. Smith —The costings did not change. Basically, the measures that were announced by the government in November said that the detail of the criteria would be further developed, and we have done that. The view is that the coverage is basically the same as would have applied at the time of the November announcement which was in turn based on the Ralph recommendations.

Senator CONROY —But Ralph was based on a different set of criteria than appear in the bill.

Mr G. Smith —Well, they are different in some degree, but not entirely. The basic purpose is to establish a concept of a personal services business. As you know, Ralph provided the Victorian payroll tax criteria which essentially seeks to establish a degree of entrepreneurial risk. The measures which we have adopted in some cases are similar to those in other cases. They are modifications but have the same basic idea—to establish a distinction between when personal services are provided in the course of conducting a personal services business and when they are not. We have no reason to believe otherwise than that we would essentially be drawing a very similar boundary with these measures as were implicit in the costing done for Ralph.

Senator CONROY —We have had distributed—and I am sure you have seen it—the Pay-roll Tax Act, which is what Ralph was recommending and what the Ralph calculations were done on.

Senator MURRAY —Could I just ask if he could formally table that, Mr Chair?

CHAIR —Sorry, yes, thank you.

Senator CONROY —There are three and a half pages of tests, but when I saw the definitions you seem to have got them down to a very short couple of paragraphs. Do you have to pass them all? Do you have to pass any of them? Do you have to pass four of them? It is just that under the bill you have to pass only one to qualify.

Mr G. Smith —My understanding of that act is essentially that you have regard to a variety of considerations in making this decision. In that case the decision is not the same as the decision that is being made here, it is the decision about whether or not certain payments should be subject to payroll tax—which is a base decision—and you have regard to a variety of things. In this case what we are doing is making a decision about whether or not a personal services business is being conducted in order to derive the personal services income, so we have come up with tests which draw that line. Either way you only draw one line, which is whether or not there is—

Senator CONROY —As you said, they have regard to a whole variety of issues.

Mr G. Smith —A variety of issues, and it can be made subjective. We went through those and a judgment was made that as written they would not suit our purpose, but we came up with things which we thought would suit the purpose. Do you know more about the pay-roll act?

Mr M. Smith —No, I think if you look at what was in the Ralph report, whilst the tests are numerous, they do cover things like whether or not the income is in fact personal services income in the first place. If the income is not personal services income, for example because of the level of infrastructure that is being used or the business structure that is being used to support it, that is not really an issue at the level that we are worried about in the bill. If it is not personal services income, it is not subject to the measure.

... the degree of entrepreneurial risk, whether more than one person is contracted to whether incidental services are provided in conjunction with trading stock.

If you are in the business of selling something, we would not regard that as being personal services income, it is income from the sale of something. As a result, those sorts of tests do not make their way to working out whether or not it is a personal services business.

Senator CONROY —So providing a service is not selling something?

Mr M. Smith —You have to provide some service when you sell something. If your business is just in the business of selling TVs or selling other sorts of material stock then we do not regard that as personal services income. It is not mainly from your work, it is mainly from the selling of an item.

Senator MURRAY —I have a quick question on this topic. Is it possible under the law at present that people could be classified as employees for the purposes of the Victorian Pay-roll Tax Act but are getting themselves classified as businesses for the purpose of the federal tax act? Do we know whether people are deliberately manipulating the situation to minimise tax on that basis?

Mr M. Smith —I am not an expert on their legislation, but from discussions that we have had with the Victorian people I think their legislation is intended to wander into the contracting area and in some cases even to pick up some entities and bring them into the payroll tax environment.

Senator MURRAY —But it is possible, is it not, for somebody who is a clever tax avoider to tell the Victorians that for the purposes of payroll tax that they are an employee and tell the ATO that they are a contractor in a business?

Mr Chapman —Could I add a clarifying comment there? The payroll tax system is a tax levied on the employer and it is for calculating that employers liability that the issue of the nature of the service provided would apply—obviously this measure is directed at the tax liability situation of the actual worker in the arrangement. So while there are obvious links, I think we are speaking of two distinct regimes there.

Senator CONROY —I have the relevant page from Ralph, page 291. He says, if I can use my shorthand, these criteria include a control test—that is how he starts off. Which of your criteria go to a control test?

Mr G. Smith —The control test was one that is now a decade old, and there has been a very major change in employment relationships over the last decade. The feeling was that the control test would not operate very effectively at all for us and that is why the control test was not maintained in the arrangements which we have put forward.

Senator CONROY —But the calculation that you would have done on the estimates in Ralph would have included some notional control test?

Mr G. Smith —There are implicit concepts that distinguish personal services income from other income. For example, in the result test—the so-called fourth test—there are implicit issues that are of a kind that are in the specific control test.

Senator CONROY —Implicit so a judge would understand, or the tax commissioner would understand?

Mr G. Smith —They would understand it because it is referred to explicitly in the explanatory memorandum to the bill. For example, there is a reference in the explanatory memorandum to the bill under that test. I cannot give you the quote off the top of my head but I know it goes to the effect that if the person is being engaged for certain hours, as opposed to being engaged to deliver a particular service—which is a distinction that would relate to that sort of control concept—that is specifically drawn attention to as not sufficient to meet the requirements of the fourth test. So there is some guidance in the explanatory memorandum relevant to that. The concepts have not gone missing entirely, what has essentially been done is that we have tried to use more modern language and more objective language. The evidence we had was that the Victorians had enough difficulty as it was with their tests and that we would be better to have more objective tests. That is the reason for that. The quote that I was referring to is, I am advised, paragraph 1(114).

Senator CONROY —I'm sure I have bored you at committees before with my past life but I just wanted to return to my previous occupation with the Transport Workers Union where I had to deal with owner-drivers, subcontractors, employees and the changing nature of the employment contract.

Senator MURRAY —Can you give us a Hansard reference for these remarks?

Senator CONROY —I am trying to get my head around the case of an owner-driver subcontractor in the transport industry who has been working one day as an employee with the company and comes back on Monday as an owner-driver with his own rig, the company colours, a company radio and uniform. Would someone like that now be caught?

Mr G. Smith —So he has his own rig?

Senator CONROY —Yes. I am just looking to find out whether someone like that would be caught now?

Mr Chapman —Quite definitely not.

Senator CONROY —He would not be caught by this legislation?

Mr Butler —There is actually an example in the explanatory memorandum that talks about a person who has their own truck and a backhoe and does work.

Senator CONROY —Even if their truck is financed by an interest-free loan from the company?

Mr Butler —The example does not discuss that particular matter, but it goes to the threshold issue of is the payment really for the services of the person or are there assets that are used in producing that income.

Senator CONROY —The company is just being helpful. Where would someone in that circumstance—

Mr G. Smith —The circumstances there would be that the payments being received would not be principally for personal services. They would meet all of the business costs, including lease costs. This is actually a prior set of tests in the law to the business tests. It goes right back to the question: is this personal service income? Presumably, the person is being paid vast amounts of money to meet fuel costs, rig costs, all sorts of things, rather than—

Senator CONROY —There are some truck drivers in Brisbane at the moment who would like to have a chat to you about the vast amounts of money they are paid to cover for their petrol costs.

Mr G. Smith —Put it this way, relative to the personal service component—which is the labour income—which as you say is probably very small. Perhaps I agree with you.

Senator CONROY —They have also received a letter from their bosses recently telling them how they are going to claw back their savings from the GST package; they would also like to have a chat to you about that, but that is a different day.

Mr G. Smith —It is a different day.

Senator CONROY —Perhaps next week.

Mr G. Smith —I think the key point there is , you do not even get into the system if basically we are not talking about personal services income, which is fundamentally income which relates almost entirely to the provision of—

Senator CONROY —Just so I can get it clear, the company says to all the drivers on Friday, `Come back on Monday as owner-drivers. Here is the package to help you buy the truck. You are now going to be paid what I would loosely refer to as the owner-driver rate'—that large amount of money that you were referring to—`which incorporates a petrol component, a wear and tear component on the truck, and then maybe if you are lucky 20 per cent might be personal services income.'

Mr G. Smith —We are talking very general language here, but unless it is a contrivance to avoid the law or to get around the law—I think I should always make that observation that we are not dealing with—

Senator CONROY —It is a business decision, a business restructure.

Mr G. Smith —The person is essentially going into business and is obtaining business income.

Senator CONROY —So perhaps that might not be caught under this. Who is left of the 230,000?

Mr G. Smith —I do not think a lot of them were people in the transport industry.

Senator CONROY —I would hope some of them were.

Mr G. Smith —There may be some.

Senator CONROY —I know my friends from the CFMEU are here and a lot of their industry is covered by it, but the membership of the Transport Workers Union is about 40 per cent owner-driver subcontractors in this very situation.

Mr G. Smith —It is a question of whether or not the truck operators—

Senator CONROY —As Andrew continually reminds us, the private sector unions cover only 20 per cent of the workers, so 40 per cent of our 80,000 membership is still 20,000 or 30,000 of the ones we cover, and we only cover a small number in the industry. You are saying that any truck driver who is currently an owner-driver in those circumstances would not be caught?

Mr Chapman —That is correct, in those situations where there is a significant investment in capital and it has the characteristics of operating a business, but that case would not be covered by the legislation for this proposed bill.

Senator MURRAY —That test is liability, is it not, the liability for capital equipment for loss of the rig, those sorts of things?

Mr Chapman —Yes.

Senator CONROY —Can you give me an industry profile of the 230,000 then, seeing as how you have excluded all of mine from this where I thought that actually a couple of them might not get caught.

Mr Chapman —Well that was only one example. Sticking with your industry for a moment, we are aware of some situations where train drivers have been—

Senator CONROY —Sorry, that is public transport—there is a demarc here. Public transport is a different union. Train drivers fall outside my area of expertise.

Senator MURRAY —Are you saying you do not care about them?

Senator CONROY —No, they just fall outside my sphere of expertise. Please, keep going.

Mr Chapman —In the example of train drivers there is perhaps one of the more extreme examples of the Friday night/Monday morning arrangements you have discussed. There would be people who are basically providing services which come from their own endeavours and there may not be materials provided. What they are bringing forward is their own skill and knowledge and application to the task. I think it is important to note that the proposed legislation is not intended to categorise people as employees—in fact, it is quite deliberately structured so that normal commercial transactions would be recognised and apply. For instance, if a worker did work through an interposed entity or company, the supply acquirer would be dealing with that company in normal transaction arrangements and GST or other aspects of that arrangement might apply. There is no disturbance at all to the normal commercial arrangement. All the legislation is seeking to say is that when that income received by the entity is distributed that it is actually funnelled to the person who provided the labour to earn the income. I think there will be a number of examples where one could point to that—for example, the industries covered in earlier hearings this morning.

Mr Butler —If I could just add to that. There is also the aspect of deductions that may be available in addition to how the income players to the contract providers—

Senator CONROY —Don't worry, I was going to come to deductions. As I have said in previous hearings—and I think Geoff Lehmann even wrote it up—I used to work with drivers who were employees on Friday and then came back under the new structure and they paid 10 cents in the dollar from then on, as they cheerfully informed me. Even though Ralph recommends some degree of a controlled test, you feel that the changing nature of the economy does not help you with your—

Mr G. Smith —Aspects of it are implicit in other tests, but the tests that have been chosen are more objective and in the circumstances of quite diverse employer/employee and contractor relationships it is pretty difficult now to find a meaningful, objective distinction in that concept of control in the workplace. That was the reason we found that too difficult.

Senator CONROY —Some bosses are going to be surprised to hear that: Treasury have just said they are not in control. The 230,000 people, where are they? Tell me where they are.

Mr Chapman —A significant number would be within the building construction industry, there would be others in the IT industry, as has been discussed earlier this morning, and there would be a sprinkle spread through other industries.

Senator CONROY —Are we talking 70 per cent in the building industry, 80 per cent, 50 per cent? I am not trying to pin you, I am just trying to get a rough picture.

Mr Chapman —If I was to take some guidance from the current prescribed payments system, I think we would find there that something like 70 per cent of participants in the prescribed payments system are in the building and construction industries.

Senator CONROY —So are you picking the 230,000 figure because that is how many people are currently in the PPS system?

Mr Chapman —No, not at all.

Senator CONROY —How many people are inside PPS? Are there more than 230,000? Is it a million?

Mr Chapman —No, I think it is in the order of 170,000.

Senator CONROY —Okay, 170,000. You are saying it is about—

Mr G. Smith —As I understand it, Senator, roughly half the people caught by the measure we would expect are currently in PPS and roughly half are not. The diversity of industry involved is, I think, limitless when we get outside the PPS. Obviously the PPS is a defined range of industries. Outside of the PPS you would find that there are any number of people who are set up as contractors of some kind. In fact, there are over half a million people who are contractors of some kind in Australia. We are only dealing with a minority.

Senator CONROY —About half of them—230,000?

Mr G. Smith —More like a third, I think, because as well as the ones that I mentioned there are also over 100,000 entities that are unincorporated. So, even when the transitional measure is passed, I think overall we are talking about this measure affecting a third or less of the total group of people who perhaps describe themselves as contractors.

Senator CONROY —I am sorry, I might have missed it, but just in terms of the relative weighting the building industry would make up 50 per cent? I am not trying to put figures in your mouth, I just was not sure if you answered or not.

Mr Chapman —At a very rough guess, perhaps the building industry might be in the order of a third of the numbers there, but I—

Mr G. Smith —Of the 230,000, rather than of the PPS component.

Senator CONROY —Of the 230,000, you think about a third of that are from—

Mr Chapman —As a broad indicator.

Senator CONROY —Is there any other large clump? I appreciate your saying they were limitless but are there any other industries that are heavily represented in the 230,000?

Mr G. Smith —I think you have had submissions from the IT industry. It is a bit hard sometimes to give them an industry title, but the sort of broad consulting field is obviously a significant field for the outside of PPS group.

Mr Chapman —Consulting, the cleaning industry.

Senator CONROY —Just going back to the objective test, for an owner-driver is the percentage of personal service income a factor? If 70 per cent is to pay for the petrol and running costs and other things and 30 per cent is the labour component, is that a relevant issue? I am thinking that in a big rig it is obviously going to be a majority of the rate, whereas if you are a small courier and you have bought a Hiace van it is a much smaller proportion and the personal service labour component is likely to be a much greater proportion.

Mr Chapman —Sorry, Senator, I perhaps need to—

Senator CONROY —Mr Smith was helping me before.

Mr Chapman —I think Mr Smith stated that owner-drivers would not come into this system at all. In that sense they are excluded before they come through the gate.

Mr G. Smith —That is not about any of the so-called four tiers. It goes right to the beginning of the law to the question of whether or not we are dealing with personal services income.

Senator CONROY —So the labour component is irrelevant to—

Mr G. Smith —It is all part of the one contract.

Senator CONROY —They pay a rate that is based on the labour component and petrol and wear and tear and all the other bits that go into dragging a container up and down the highway.

Mr M. Smith —In the concept of personal service income there was some talk about whether if was mainly a reward for your efforts or skills. I think one of the earlier submissions may have talked about, was it, `substantively'. There was a word anyway and there was a change to `mainly', which basically in tax law terms we look at as being more than 50 per cent. But right at the opening of the act, in section 84(5), it says that you will have some personal services income if the income is mainly a reward for your personal services or your personal efforts or skills. Then underneath that section it actually gives an example of the semi-trailer driver and the result is `no'. It gives another example of where there is a large accounting firm that has got lots of employees and that firm's income is also `no' because it has the employees.

Senator CONROY —I can understand why the labour component, the personal services component, of a big semi-trailer is not going to get you to 50 percent, but I am trying to get to an understanding of this objective test. If you just have a Hiace van—which is the courier sort of van that drives around the city and do the short trips—it may be that the personal services labour component consists of more than 50 per cent. Would that then fall in?

Mr M. Smith —It may be.

Senator CONROY —That is still an owner-driver in terms of how I define an owner-driver—it is not just a big rig. In my industry the size of trucks was important.

Mr M. Smith —I think it is always a matter of looking at what you have got before you. If we could move down to a push bike, for example, Crisis Couriers—

Senator CONROY —Yes, Crisis Couriers, the bane of my life.

Mr M. Smith —I still do not think you are there. But then from there up to the large rig really depends on what circumstances you have before you.

Senator CONROY —So there are some owner-drivers in the transport industry who would now possibly be covered and caught by this test?

Mr M. Smith —What has been foreshadowed in the explanatory material is that there will be significant guide material and ruling material to help people work through exactly what these descriptors are; what are these lines that have to be drawn in order to work out whether or not the income you are getting is personal services income.

Senator MURPHY —What about, for instance, in the forestry industry where you have a person who works for a contractor who might have log loading equipment and might own trucks. The subcontractor is the feller, the person who fells the trees and provides the chainsaw—and he might provide two chainsaws or three or four—and has a vehicle. What about them?

Mr M. Smith —What sort of a vehicle? What is he doing?

Senator MURPHY —He fells trees.

Mr M. Smith —And then what? Does he put the trees on his vehicle?

Senator MURPHY —No.

Mr M. Smith —He just drives to work in his vehicle?

Senator MURPHY —He drives to work and fells the trees.

Mr M. Smith —And he does not use his vehicle?

Senator MURPHY —He cuts the heads off the trees and deleaves them.

Mr M. Smith —So his basic tool of trade is his chainsaw?

Senator MURPHY —Chainsaws—he would have more than one, he might have three or four.

Mr M. Smith —I would have thought you were down into personal services income there.

Senator MURPHY —The vehicle he has is both his work vehicle and personal transport as well.

Mr Butler —He might call it his work vehicle but in fact he might just drive it from home to his place of work. That is an issue in itself.

Mr M. Smith —Senator, I did not know whether it was his vehicle that he was then going to load the trees on to after he had sawed them down.

Senator MURPHY —No, it is just a four-wheel drive ute.

Mr Chapman —For transporting his chainsaw.

Senator MURPHY —It may not be his personal vehicle or it may be one that he uses personally as well.

Mr M. Smith —To me it is reasonably clear that what he is doing there is getting personal services income. He needs his chainsaw to do it, but maintaining his chainsaw probably would not be the substantive portion of his remuneration, it would be for the work that he is doing.

Senator MURRAY —The chainsaw would remain a deductible item.

Mr G. Smith —Well, then there is a second round of questions. The first question is: is this reward for personal services, and it would mainly be for personal services. We are having to surmise here what the facts are, but on those facts it would seem unlikely that much of the reward is related to the cost of chainsaws, relative to the total reward. So mainly it is for personal services, namely in this case his labour. Then the question becomes—and these are the so-called four tests, or three, as it may be—whether or not that personal services income has been derived or gained in the course of running a personal services business. That is the second issue. Then we have to establish whether or not this chap is in business; that is the second question.

Senator MURRAY —Which relates to the number of people he contracts to?

Mr G. Smith —No, we are dealing with just the guy that does the cutting, are we not, not the guy that he works for but the guy who does the cutting?

Senator MURPHY —He may work for a number. That person could work for a number of different contractors or companies.

Mr G. Smith —Which might put him in the position where he might meet the unrelated clients rule, or he might not—that is a second order question that we then go to to find out whether he is in business.

Senator MURPHY —Say it is a person in the IT industry who has two laptops and a car that they drive to business—

Senator CONROY —He has visited Parliament House recently, has he?

Senator MURPHY —I am just wondering about the same sort of circumstance.

Mr G. Smith —I do not know what—

Senator MURPHY —As the witnesses stated this morning, they may work for a number of agencies.

Mr G. Smith —Employment agencies?

Senator CONROY —They could be employed at Parliament House.

Senator MURPHY —Well, he could work for agencies within Parliament House.

Mr G. Smith —They might be a service provider, for example, who basically does a help type function or whatever.

Senator MURPHY —Yes.

Mr G. Smith —Let us presume—because this is all just assumption here—that most of the reward is for the personal services of that person. He is then in the personal services thing. Having been caught by the first test, the second question is: is that person conducting a personal services business? We have separate tests for that.

Senator MURPHY —The argument this morning has been they would be because of the expertise that they have that they would need to do the job.

Mr G. Smith —No, it will not be enough to have expertise, that is not one of the four tests.

Senator MURPHY —I know.

Mr G. Smith —It presumes that all of these people have expertise; that is presumably why they are selling their services. The issue then becomes: can they meet the unrelated clients test, the employment test, the business premises test or the so-called fourth test. Having established that they are in fact in receipt of personal services income, they become the facts which then determine whether or not they will be affected by this measure.

Senator MURPHY —Would the tree feller be different from them?

Mr G. Smith —Not in concept, no. Obviously the facts are different.

Senator CONROY —On page 724 of the Ralph report it makes the revenue estimates partly based on the assumption that 40 per cent of non-agricultural unincorporated contractors and owner managers of incorporated enterprises deliver their services in an employee like way. What per cent would be caught by the legislation?

Mr G. Smith —As I said before, there are different figures for different types of entities, but it is broadly that order of magnitude. I think it is closer to a third all up when we bring the entities in, but the individuals were of that order. But not every contractor was in the primary data set for that so I think it had already been reduced by 25 per cent to take account of those who are over-claiming deductions.

Senator CONROY —Forty per cent is a large figure.

Mr G. Smith —Yeah, but the 40 per cent of 75 per cent becomes about a third, which is about what we are getting. As I said, the 230,000 is about a third of the total, so they are consistent. We have not changed the data sets that are behind the revenue estimates. I make that point to you: there is no change in the figuring, other than, of course, the transitional measure.

Senator CONROY —Other than the transitional measure.

Senator MURRAY —That is a question I would like to ask. If the transitional measure was moved by one year so that it was only one year and not two, what is the effect on revenue?

Mr G. Smith —From memory the transitional measure costs $190 million per annum, so presumably we would more or less halve the cost.

Senator MURRAY —So it brings forward $190 million?

Mr G. Smith —Broadly. There may be some tax payment effects because of the operation of PAYG which might not bring it forward in the whole amount.

Mr M. Smith —Would it help if I just ran through the first year's revenue with the PPS?

Senator MURRAY —I have the table in front of me. I would just like an indication of what the revenue effect would be if the parliament were to suggest to you, through an amendment, that the transitional measure was one year and not two.

Mr G. Smith —I think we have $190 million per annum.

Mr M. Smith —We have $190 million per annum with regard to a two-year exemption, so that would stay what it was. In the next year it is $290 million. One would expect that if it was a one-year exemption, rather than a two, maybe that $290 million would be increased. You can see, it goes $190 million, $290 million, then $435 million.

Senator MURRAY —That is right.

Mr G. Smith —The cost is $190 million relative to Ralph in the first year. Some of the cost is in 2002-03; that is what it makes it slightly complicated. For one year it is a bit over $200 million, for a second year it is a bit over $200 million, so the total saving, which might be spread over two years rather than one, would be over 200 million.

Senator MURRAY —So the additional revenue generation on the table from 2000-05, which is what we have, would be about $200 million?

Mr G. Smith —Yes, a bit over.

Senator CONROY —If you are able to break it down, how much money is estimated to be raised by each industry? We said about a third is the building industry but are they going to provide 50 per cent of the revenue or 80 per cent of the revenue?

Mr G. Smith —There is no breakdown in Treasury.

Senator CONROY —You have not done one.

Mr G. Smith —No.

Senator CONROY —Is there one available with Ralph or anything like that?

Mr G. Smith —I am not aware of it.

Senator CONROY —Do you know how much this bill is going to cost the average contractor who gets roped in? Is there a calculation? Is each person going to be paying $3000 more tax or $10,000 more tax?

Mr G. Smith —If we talk about 230,000 affected persons and a long run implication of the order of $500 million, it is very close to $2,000. It is a bit over, but it is $2,000 per case. Now, there is a big spread in that and we would not want to imply—

Senator CONROY —I am asking for an average figure. I am not trying to pin you down.

Mr G. Smith —It is somewhere between $2,000 and $2,500, but that is very much an average which would vary enormously from case to case.

Senator CONROY —Sure. Could you just describe to me in a truck driving sense—because I am familiar with that—who would get caught? You have given examples of who will not be caught, but who would actually be caught? I am happy if you cannot give the transport example but just explain to me someone's circumstances where they would be caught. Who would fail all these tests?

Mr Chapman —I would say an example may a truck driver who is an employee truck driver and does not provide their vehicle or meet any costs of operation but who comes back next week and is perhaps paid through an interposed entity, again not meeting any expenses of running the operation, so is purely being paid for the services they provide. Through that interposed entity they may then seek to split the income with their spouse, so there would be wages to spouse and there would perhaps be superannuation claims made in respect of that spouse.

Senator CONROY —Would the income splitting be an important part or would it just be someone who—to use your train driver example—was there Friday morning, come back and they are a company on Monday morning. You would probably catch them?

Mr Chapman —The legislation is intended here. To continue with the example, there is income splitting, which might be through trading trust arrangements existing to other members of the family or other beneficiaries. There could then be a range of deductions claimed by the interposed entity in the nature of superannuation to associated parties. The company may claim it is operating a business premises from the residence of the worker and claim deduction for mortgage interest or other sorts of work-related expenses. Driving the family vehicle to the trucking depot could then be claimed as a business deduction. That would be probably at the more extreme end but it is the sort of scenario that is—

Senator CONROY —I understand if they claim all these things but what if they do not claim any of those things and just come back on the Monday morning and it is all personal services, without income splitting and all those other things?

Mr Chapman —I can give you another example of the same situation but a different scenario. The interposed company is put in place, the income earned by the company is paid out as salary and wages to the worker and there are no other deductions claimed. There would no tax consequences from this particular measure.

Senator CONROY —If we go to the building industry: you turn up and you are providing a toolbox, therefore you are providing some of the tools. In the truck driving case it is easier to conceptualise because you have a big truck in front of you, but the skills on a building site are a different set of skills and a toolbox is critical to performing any of those things. Is someone like that going to be caught?

Mr Chapman —It is difficult to generalise, but someone working on a building site might provide some hand tools. Those hand tools would be deductible to the individual in the normal course of events. But, again, if it is a provision of personal services he would be covered by this measure.

Senator CONROY —So they would be caught? If you just turned up in your ute and you had some tools you would be caught?

Mr G. Smith —Again, the tests are in the bill so—

Senator CONROY —I am trying to find examples of who would be caught.

Mr G. Smith —For the sake of the discussion, yes, we would be talking about someone who goes to the building site, provides their labour, gets paid accordingly. If they then sought to claim other business-related deductions or split their income with other parties they would be covered by this measure.

Mr Butler —Can I just add to that. As Mr Smith said before, it is the threshold test. If you fall into the particular personal services income then there are other tests to look at beyond that to see if they might be excluded.

Senator CONROY —You keep adding, `If they then did other things,' so I am just trying to separate it out. If they just accepted the payment as personal—

Mr Chapman —Again, I will need to take you to the tests that are in those—

Senator CONROY —We will be coming to them.

Mr G. Smith —I think it is worth noting that the first thing they have to do is actually establish that they are no longer an employee. The law, which may require them to be treated as an employee, may still apply in the sense that the PAYE-type situation may still apply—the issue of whether or not they are still receiving salary and wages. Your questions were assuming that somehow something has been done which gives effect to the fact that they are no longer being paid salaries or wages, they are instead being paid something which is not subject to that withholding; they have somehow sufficiently changed the circumstance to come under the measure at all. It does seem that in all of the cases you are running they would be providing services that lead to the derivation of personal services income. Whether or not this measure affects them will depend firstly on whether or not they have sought to obtain any tax benefit as a result of the change, which a percentage of people do not, and obviously they are of no concern. Whether or not those changed tax arrangements will have effect for tax purposes depends on whether or not they are conducting a personal services business.

Senator MURRAY —Could I put a quick question. One of the propositions put to us was to turn the three self-assessment tests into four, using the fourth test that is already in the legislation. My own question, not one put by witnesses, is that in those cases there would be a need perhaps to pick any two out of the four, rather than any one, on the self-assessment test. In other words, raise the bar. Do officers at the table have any view as to the likely effects of such a proposition?

Mr G. Smith —The scheme of the law is that if you meet one of these tests you are judged to be deriving your income through the course of conducting a business. It is the government's view that any one of these tests is sufficient. If you require two tests out of four then implicitly you are saying that there will be circumstances where under the original proposal the person is in fact conducting a business but that that business will not be recognised for tax purposes. So, I guess, you have to make a decision. The issue becomes: are you satisfied with actually treating some businesses, under the tests as constructed, as not being businesses for the purpose of the tax law?

There would be a lot of businesses or a lot of contractors who would certainly fail the employment test. Most self-employed people are not going to be able to meet that test because they do not engage any further staff. They may not, because of the circumstances of their business, meet the business premises test because premises are simply irrelevant to the conduct of their business. You are then left with the unrelated client and the fourth test. The fourth test only applies where there is a contract for producing a result, so it is a narrow test; it is narrowed by that particular legal restriction and then there are further narrowing factors. So you would be requiring two. You may well be in a situation where someone who quite clearly is holding themselves out as a business with unrelated clients—and it could be 20 such unrelated clients—would fail all three of the other tests, so there are issues about whether you want to do that.

We are not here to give policy advice to the committee, other than to observe that in the government's view that if you made it a double test there would be people in business who would not be able to get the tax treatment of a business.

Senator MURRAY —In a revenue sense, making four tests available for self assessment—but just needing to meet one of the four—I assume would reduce revenue, and making it any two out of the four would, I presume, result in increased revenue?

Mr G. Smith —You would expect that. I would make the observation that the so-called fourth test is one which is restricted in the law to a commissioner's determination. There would be concerns about that test if it were self-assessed.

Mr Chapman —Perhaps if I could just add to Mr Smith's comments. The first three tests are, by their nature, of a more objective kind: do you have employees, do you not; have you advertised, have you not? The fourth test does introduce a degree of subjectivity in determining the answer with a view to providing greater certainty for business. I think the government had in mind that it was perhaps a test better considered by the commissioner.

CHAIR —We are running into a bit of a time problem so I suggest further questions go on notice.

Senator CONROY —I am sorry, but 45 minutes—

CHAIR —Senator, this is a committee decision; it is not yours. The committee is running out of time.

Senator CONROY —If you want to close the committee down, Chair, that is your prerogative.

CHAIR —Senator Conroy, please do not carry on.

Senator CONROY —If you want to close it down so that we cannot ask Treasury questions and restrict it to 40 minutes, or whatever it was that was allocated, that is fine, that is your decision.

CHAIR —You have had most of the three-quarters of an hour which was allotted for Treasury and Tax.

Senator CONROY —We are doing our best to cooperate with the government's schedule in trying to pass these bills. I am simply offering a suggestion that we could adjourn Treasury and hear the other witnesses, so that they are not being held up, and then bring Treasury back and keep going with Treasury. If you do not want to take up that offer that is okay, I am just offering that as an alternative.

CHAIR —It is a committee decision—

Senator WATSON —Mr Chairman, I think it is more important for us to hear the witnesses because I think the legislation is fairly straightforward and we understand that. We are interested in hearing the concerns from witnesses of where they feel there may be problems.

Senator MURPHY —Yes, but what the witnesses might have to say would be relevant for us to ask Treasury.

CHAIR —In which case you can put questions on notice to Tax and Treasury. You will have an opportunity to do that.

Senator MURRAY —Can I put one on notice now?

CHAIR —Please, Senator Murray.

Senator MURRAY —The question I want to ask on notice is this: witnesses have complained that on fringe benefits tax and deductions they will be unfairly discriminated against in terms of how other employees or other businesses are treated relevant to their classification. I would like to ask the officers at the table if they could review that evidence and give the committee some response as to whether there is unfair or unequal treatment of persons who end up being classified as employees or businesses under this legislation.

CHAIR —If you have further questions for Tax and Treasury in the next couple of minutes, please go ahead.

Senator CONROY —I have pages of questions and—

CHAIR —I have offered a suggestion.

Senator CONROY —If you are saying that I have to be finished by any particular time, could you let me know.

CHAIR —Senator Conroy, we are doing our best to accommodate your requirements.

Senator CONROY —And the opposition is doing their best to accommodate the government's requirements on wanting to rush this bill through. We have agreed to meet when I am meant to be in a different committee—we are all meant to be somewhere else. We agreed to facilitate this bill, and is a very complex bill, as has been demonstrated by the discussion this morning. If you are saying that all we can have is 45 minutes to ask Treasury questions, then say that.

CHAIR —You have had 45 minutes. I have just conferred with the deputy chairman and we have agreed we will squeeze another quarter of an hour out of the lunch hour, so I am happy to go to a quarter to one. We have other witnesses due at—

Senator MURPHY —What we are saying is that we can bring the other witnesses on, because there will be questions that will arise out of their submissions that will be relevant for us to ask Treasury, in particular with regard to the construction industry which has been highlighted as one of the principal areas by the officials here before us. We have the CFMEU as witnesses who will provide the Committee with a valuable insight as to the questions that we might then want to ask the Treasury officials. That is what I was suggesting with regard to extending the period of time. It will not take us long to deal with the other witnesses and then we can proceed to finish off with Treasury and that will only put us back by about 15 minutes.

Senator CONROY —Fifteen minutes will not go anywhere near covering it, but I think it is a reasonable proposition that we—

CHAIR —If the officials are willing to do that, let us break from this particular section of the hearing and I call the Housing Industry Association.

[11.55 a.m.]