Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
ECONOMICS LEGISLATION COMMITTEE
23/05/2000
New Business Tax System (Alienation of Personal Services Income) Bill 2000 and two related bills

CHAIR —Welcome, Mr Simpson and Ms Morschel. We have received your submission, do you wish to make a short opening statement?

Mr Simpson —Yes, thank you. Very briefly, I think that the HIA's concerns about the Ralph committee's report are well known and we believe that the bill currently under consideration by the committee is a very substantial improvement on the original Ralph recommendations. We believe that it will be effective in catching the tax avoiders and evaders that the government is seeking to catch, but it will not unduly damage the legitimate contractors who operate in the housing industry and who have traditionally operated in a contractor structure for over 17 years under the PPS system with excellent results and some of the finest housing affordability in the world currently being available to Australian house buyers.

There are a couple of technical points about the legislation that we have made in our submission. To sum those up, we believe that all four tests ought to be available. They ought to be available by way of self-assessment for those under 80 per cent and a determination being available to anyone, but required for those who derive more than 80 per cent of their personal services income from a single source. We also consider that the tests ought to stand as they are. We say that a multiplicity of tests would not be helpful and in that regard we respectfully adopt what was put by the officers of Treasury and Tax.

If the 80 per cent test still applies, and it really is those sort of people who are dealing with a single source of income at which this measure is principally aimed, if the 80 per cent test still applies then the Commissioner of Taxation will be making a determination in respect of those people. If there are folk who do not in fact get 80 per cent of their income from a single source, then we say that test number four is equally effective and equally applicable in order to be open to those people to self-assess on, having regard to the fact that the commissioner can always audit them and always substitute his judgment for theirs.

We believe that the measure is aimed at catching people who are working in an employee-like way, and under those circumstances it does a pretty good job.

CHAIR —Ms Morschel, do you wish to add any comment?

Ms Morschel —The only comment I would make is that we have only five weeks to go before the new tax system operates. The HIA is rolling out business education programs for over 70,000 members of the industry and there has been a huge emphasis on GST education and advice. Obviously there is a whole new area of tax reform that needs to be addressed in business education, pay as you go and Ralph and I think some certainty on these matters would be welcomed by the building and construction industry.

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

Senator MURRAY —Thank you, Mr Chairman. One of the measures you reflect on has concerned me as well, and that is the test that a person should offer or advertise their services. It is a fact that in the conventional sense of that phrase many IT consultants, cleaning people and building contractors do not do that—they respond to advertisements, they network, it is word of mouth, they know people. You remark that that is a poor test; is that correct?

Mr Simpson —Senator, I think it is fair to say that if we had our own way of drafting the test it may differ slightly from the test in the bill, but we believe that that test is not an unreasonable one. It is certainly true that many people in the construction industry operate on word of mouth or respond to tenders. Nevertheless, if they are genuinely running a business and genuinely dealing with the public then we think it is by no means unreasonable to require them to advertise, or to demonstrate that they are running a business through their advertising. For many years the HIA has been telling its members that for a whole variety of reasons—including state legislation dealing with payroll tax and workers compensation—there is a need for contractors to show that they are contractors and not employees.

The CFMEU is rightly been assiduous in pointing out situations where people are in employee-like situations, and indeed may be employees, and it has always been our concern for people to demonstrate that they are genuinely a business. Advertising is one of the ways that they can do that. We do not think it is an unreasonable requirement for people to have before them, so long as they are given a reasonable time to bring themselves into the new system. We believe that two years is reasonable, given there is a new tax system this year, a new business tax system and the other elements of the new business tax system next year. People do need time to cope with these changes and with changes to their tax status through this particular piece of legislation, and the tax office needs time to adjust as well, of course.

Senator MURRAY —Your answer seems inconsistent with your submission, but perhaps I have misunderstood you. On the last page of your submission you say the following things:

There may be a class of persons who will fail the first three tests on self-assessment (or on an ATO audit) and cannot be assessed by the Commissioner on the fourth test as they derive less than 80% of their income from one source. For example, a person who does not employ or maintain separate business premises but who obtains 50% of their income from source A and 50% from source B would normally be able to pass the unrelated clients test. However this test requires that the services must be provided as a direct result of offers or invitations to the public.

You then go on to say:

This is clearly anomalous and inconsistent with the scheme as announced by the Treasurer. Discussions by HIA with Treasury officers have suggested that this is an unintended consequence of marrying the form of the Ralph recommendations with the form of Government's new decisions.

My reading of that was that you thought the direct result of offers or invitations to the public did not fit well with this.

Mr Simpson —No, I would have to say that that was not our intention. Perhaps we have rather infelicitously expressed what we meant. What we felt there was that there could be circumstances where someone may not be over 80 per cent yet may fail one of the three tests. That was an example of how you could fail a particular test. We were not criticising the test, we were merely saying that there could be circumstances where somebody could fail all three tests yet if they were able to be assessed by the commissioner under test four they would pass that test, but they cannot get access to that test because they do not derive 80 per cent of their income from the one source. It was a drafting problem that determinations were not available to those whose incomes were from more than one source, more than 20 per cent from one source and less than 80 per cent from the other.

Senator MURRAY —And you want that drafting problem fixed so that if you fail the three tests you could still apply to the commissioner?

Mr Simpson —We believe that anybody should be entitled to apply for a commissioner's determination. Self-assessment is all very well, but you are betting your business on that being right. We heard interesting evidence from Treasury earlier that $2,000 worth of tax deductions might be involved, and in circumstances it could be considerably more than that. If you are self-assessing you run the risk that at the end of the year the commissioner may disagree with you and disallow your deductions. We believe that a number of people would be interested in obtaining a determination in advance and we simply say that the determination making power should extend to anyone who applied. I would have thought that that was the Ralph committee's recommendation and understanding. It is a little surprising to find that the determination making power of the commissioner is restricted to only those who receive over 80 per cent of income from one source.

We have no particular quarrel with any of the tests themselves but we believe that all four should be available so that people can self-assess on test four. If they do not advertise to the public they may still pass test four, but if they are properly advised they will advertise to the public and pass test two.

CHAIR —Are there any other questions?

Senator CHAPMAN —Have you actually drafted a proposed amendment to deal with that?

Mr Simpson —No, we have not. If the committee would like that I can undertake to do that.

Senator CHAPMAN —That would be useful.

CHAIR —We have a time problem because we have to report by 5 June. If you have any suggestions to make to the committee could you please do it by the end of this week.

Mr Simpson —Certainly.

CHAIR —Thank you very much for your submission and also for appearing before us.

[12.05 p.m.]