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Wednesday, 31 May 2000
Page: 16641


Mr BARRESI (10:58 AM) —The New Business Tax System (Alienated Personal Services Income) Tax Imposition Bill (No. 1) 2000 presently before the House relates to the alienation of personal services income and will ensure that people will no longer be able to reduce their tax by diverting the income generated by their personal services to a company, even if they call themselves a contractor. It will also limit work related deductions available to these people. It is a bill aimed at protecting the interests of genuine micro and small businesses, whilst at the same time exposing sham entities created as tax avoidance mechanisms. It is about fairness.

Fairness is one of the main premises behind the new tax system. If everyone pays their fair share of income tax, then everyone's share should be lower. It is this premise that led to the government being able to promise that 80 per cent of Australians would be paying 30 per cent income tax as of 1 July this year. The legislation before us today is just one more way the government is making sure that people pay their fair share of tax. It is legislation which is also a response to the changing nature of work in Australia. As you would be aware, it is no longer a given that people will work their whole lives in a nine to five job. Australia is becoming more integrated into the global economy, and the work force has had to adapt to remain dynamic and internationally competitive.

More and more people are trying to find a niche for themselves in this changing global marketplace. To do that, quite a few of them are specialising in a particular area. This is evident by the increasing number of people who are establishing themselves as a micro or small business offering personal service or skills. The classic example is in information technology, and various consultancy services are currently up and running. After all, all you need is a computer, a scanner, a telephone, a mobile phone and a place to park yourself, even if it is not permanent. In fact, in some cases all you need is a car and off you go. These are the tools of trade—this is what you need to set up a business. It is a fact that the technology which has taken over the running of many jobs has enabled more and more micro businesses to be set up.

Establishing their own business has real appeal for many people. It allows both flexibility and autonomy. It is a way for women to work their way back into the work force and juggle part-time work with family commitments. This legislation provides real support for the growing number of women who want to re-enter the work force. It is also a way to get into the workplace if you have been made redundant, and to continue using your skills. It is also appealing to a number of people just because of the flexibility that it can entail. If one accepts this current scenario and the changing environment, it is no wonder that we have a proliferation of micro and small businesses throughout Australia.

Unfortunately, it is becoming increasingly common that, as a result of businesses making whole sections in departments redundant and employing contractors in their place, people out there are trying to find their niche. Whether these companies are doing it under the guise of downsizing, rightsizing or workplace re-engineering, at the end of the day hundreds of people are being thrown out of companies. These people, who may have been offering an in-house service—whether it was in maintenance, in the IT field, in human resources or even in accountancy—are now having to subcontract their skills back to that employer. For example, I have seen in large companies where I have worked in the past—I do not say this with any great pride—particular in-house teams completely wiped away. These were companies that employed a maintenance team as part of their permanent staff. That maintenance person is now more likely to be re-employed as a contractor, even though in most cases the person will report to the same line management, use the same workshop and tools and do the same job they were doing a week earlier. In fact, there still may be a smaller team present, in most cases doing the same job as an employee of that company.

There are thousands of contractors and microbusinesses in my electorate of Deakin, and they will welcome this legislation. They offer a wide range of personal services: IT, consulting, human resources, family based services, maintenance, accounting, et cetera, as I mentioned earlier. They vary in size. Some of them are single contractors working from a home office. In Deakin, more than 1,000 home based businesses have sprung up. Some of these businesses may employ associates and work from home or they may work in serviced office suites down the road. The number of clients they have and their turnover varies dramatically. But, despite their diversity, they are all generally legitimate contractors. Unfortunately, there are those in the community who exploit the current tax system by creating tax avoidance entities; people who call themselves `contractors' so they can enjoy lower tax rates and more deductibility. We have all come across them from time to time. It is a manipulative and deceitful practice that this government wants to see fixed. Unlike the contributions from the member for Hotham, this government is very serious about addressing the manipulation and the deceit that proliferates out there amongst some of these businesses. This legislation tackles that issue very well. I note the Ralph Review of Business Taxation identified this practice of alienation of personal services income as being a growing threat to the income tax base. They found it was clearly unfair that some people were reducing their tax or claiming excessive deductions while hiding behind the term `contractor' when ordinary employees were paying higher rates of tax.

Families and their welfare have always been a priority of this government. We believe in rewarding people for hard work. People that are struggling to support a family should not be expected to support people who do not contribute their fair share of tax. By removing this loophole in the tax system everyone will contribute their fair share. This will benefit everyone, not just a few. By our cracking down on people who are illegitimately using the term `contractor' as a tax dodge, revenue will increase by over $1 billion in the next three years. This has to mean lower tax rates are a reality for everyone.

To accommodate as much diversity as possible, contractors will be classified as a personal services business if they satisfy at least one of the following criteria: the person has two or more unrelated clients; has one or more employees; has separate business premises; is producing a result by supplying their own tools of trade; and is liable for the cost of fixing any defective work. I want to take this opportunity to thank the Treasurer for the work he has done in defining specifically who this legislation refers to. He listened and he heard the voices of those concerned about the genuine micro businesses being caught up in this legislation. It was particularly important to attempt to define who is in and who is out and the various definitions of those criteria.

The legislation also takes into account that there are sometimes going to be exceptions to the definition of what we define as a legitimate contractor. For example, on the 80:20 criterion there may be a circumstance where a contractor may for one particular year be receiving more than 80 per cent of their income from the one source. This may not mean they are not legitimate. It could be that they were awarded a huge contract that ran for up to 12 months and brought in the bulk of their income for that year. To a lot of contractors and small businesses, getting a contract of that size would be a dream. In fact, they would probably think that their Tattslotto numbers had come in—all of a sudden they have got a job which guarantees income over a great period with very little need to be doing any more selling. The job is not accepted as a way of avoiding their fair share of tax but simply as a fortunate circumstance of being out there and having their skills in high demand. For example, it would be common for a contractor—be it in the building industry or the IT industry—to be working on a large number of jobs for a range of clients and in one year. But, as I say, they might strike it lucky and the job goes for months, if not years, and consequentially accounts for more than 80 per cent of that year's income. This legislation recognises that business as legitimate and is not avoiding liability to the Taxation Office. I believe we are creating a fair test, not the arduous test of fulfilling all or multiple criteria. Just one will be sufficient.

But even if an entity does not fulfil at least one criterion we recognise that there could be some genuine mitigating reasons. In those circumstances, if they are legitimate personal services businesses and do not satisfy at least one of the criteria for a particular year, they can appeal to the Commissioner of Taxation to gain an individual ruling. This is very fair, a fair system that is in place for those businesses. I doubt whether members on the other side would object to that level of flexibility which will be available to those genuine businesses.

This avenue of flexibility is important in supporting small business diversity but at the same time it eliminates the bulk of people using the term `contract' as a tax dodge. It is also a far more efficient way of determining business tax levels for contractors. Because the laws are so flexible, most of them can be applied without the need to examine each on a case-by-case basis. This would be nearly impossible, given that there are 230,000 contractors affected by this legislation Australia-wide, including 120,000 subcontractors.

I would not be surprised to learn that there will be some larger businesses who would feel that their cosy arrangements with so-called contractors will be exposed. After all, many of these companies will be wanting to reduce their payroll liability by contracting out those vital services which were at one stage performed on an in-house basis. But in some cases I will concede that there will be those businesses who would be lukewarm because they have feared the possibility of anti-dismissal laws being inflicted upon them in the past. Therefore, when they have come to the situation of saying, `We have this increase in growth. We have these extra sales. We need more people to be able to do the work,' they are asking, `Do I take that risk? Do I go out and employ that person, knowing full well that I could very well be liable to anti-dismissal laws?'

These businesses are likely to be the ones that, as I say, fear the anti-dismissal laws or find that it is a burden to employ people on a full-time basis. They are businesses that should take out their anger on the Australian Labor Party. The ALP are opposing reforms to our anti-dismissal laws. The ALP should be taken to task for hindering business in their operation or in some cases stopping them employing people and expanding their business. The ALP have in the course of this debate accused the government of going soft in relation to this legislation. This is another one of their furphies. They are not happy with this legislation, alleging it is a breach of promise. In reality, I would say they are not happy about the concept of creating genuine microbusinesses. The proliferation of small business entities will be outside the control, outside the domain and the sphere of, and cannot be got at by, the union movement. Despite promising to put out a discussion paper on this issue in 1995, the ALP never acted on it. I suspect that is because the ALP has never stood for small business. Perhaps, as I mentioned, this is because it is seen as a threat to their union base.

This legislation is a direct result of the recommendations of the Ralph report. It is simply one of a number of integrity measures that have been introduced as part of the new business tax system. As a government we have always tried to be as supportive and encouraging as possible with small business. We have recognised the valuable contribution they make. We have removed a lot of the red tape involved in registering as a small business as well as cutting capital gains tax and business tax. As a result, small business in Australia is stronger than it has ever been. Even though we are being protective of small business and encouraging them wherever possible, we are also doing everything that we can to make sure that people do not rort the system and that they pay their fair share of tax.

One of the criteria for exemption in this legislation is the establishment of a separate office. This will no doubt be a criterion which will result in much defining, interpretation and possible challenge. I know that there are many local government authorities who already have local by-laws and regulations to control the proliferation of home based businesses. I am sure that their interpretation will be a vital element of this criterion. In my own electorate of Deakin, the Maroondah City Council has guidelines on a number of issues relating to home based businesses, as does the City of Whitehorse. I will be interested to see whether or not their guidelines will be acceptable by the tax office's interpretation of that criterion.

There is a false perception in the community that, if you are a small business, you will automatically receive considerable tax breaks. So they think, `Let's go out there and set ourselves up as a small business.' Perhaps one of the problems leading up to this legislation and why there is need for this legislation is that there are so many people who believe they will be getting these tax breaks. The corollary of that is that they fear this legislation removes their ability to have tax breaks. If they look at this legislation very carefully, they will see that, while there may currently be lower tax breaks for businesses, these microbusinesses would need to earn over $80,000 net per year or in excess of $200,000 in revenue in order to achieve the benefits. For a business that is just starting out, that is often nothing more than a pipe dream. When I first started my consultancy business after I left the Repco Corporation, I would have thought that $200,000 in my first year would have been fantastic, and at best I would only get half of that. So what advantage is there to being on a company tax rate? It is one of those false expectations we have when we are setting up small businesses.

Often when a person starts out owning their own small business for the first time, they may have only one client, and they certainly do not earn anywhere in the vicinity of $80,000 net per year. As someone who ran his own consultancy business, I am more than familiar with this scenario. We who have had small consultancy businesses have a saying: `When you're working you're not selling, and when you're selling you're not working.' It is only you; there is nobody else. It is up to you to do the cold calling to get that extra client. And, if you are cold calling, who is doing the work to earn the revenue from the company you have got a contract with? It is a hard life, and that is one of the reasons why we need to have some of those exemptions to the 80:20 rule and, as much as possible, allow there to be flexibility of interpretation by the Taxation Office. It is also a reason why we need to have the two-year transition period for small businesses. I am pleased that the Treasurer has included and accommodated the need for the two-year transition period for those small businesses that are just starting out. These people may have only one client in the beginning. That could very well have been their last employer who went through redundancy, downsizing, rightsizing and the re-engineering process that I spoke about before. But if they can demonstrate that they are likely to gather more clients as they progress—that they are genuine about getting more clients—they have nothing to fear; they will be classified as a personal services business.

The transitional provision allows these contractors under the prescribed payments system who had payee deductions to be excluded from the new regulations until July 2002. It will remove any additional compliance burden from the new rules that contractors who are currently in the prescribed payments system face in transferring to the new tax system. The transitional phase will minimise the compliance burden. It is consistent with supporting small business.

The implementation of the new business tax system will mean a fairer system—and this is only a small part of it. Australians hold the principle of a fair go for all dear to their hearts. And this legislation will see everyone paying his or her fair share.