Friday, June 23, 2006
Independent contractors, and the tax law anomaly
There’s a good reason that making it easier for employees or quasi-employees to be legally cut adrift as independent contractors has taken so long to be trotted out by the Howard government – revenue protection. As a matter of both ideology and implementation, the new independent contractor regime (“IC”) is a simpler beast than Howard’s two other, big IR-reform planks (Workchoices and tackling organised crime in the building industry). But because of its potential strongly negative effect on tax revenue, IC has long been left on the shelf.
Or arguably, even pushed way to the back of the shelf. In 2000, new Personal Services Income provisions in the tax act (Div 84 – 87 ITAA 1997) went wider than state-based industrial law, in deeming many (in practice, mainly white-collar) independent contractors to be employees (albeit for tax purposes only). The main effect of such a deeming is to: (i) limit tax deductions to those a conventional employee could claim, and (ii) absolutely prohibit income-splitting.
So what’s changed since 2000? Actually nothing, other than the newfound willingness of the Howard government to turn up the anomaly notch; or if not, run a serious revenue risk. This time, it’s hundreds of thousands of mainly blue-collar workers, who will soon find themselves presumably-reluctant converts to IC “freedom”, yet remaining under a tax regime officially premised on denying any substantive change to their status.
My prediction is that with the Howard government being so dependant on the votes of blue-collar aspirationals, it will yield to them, allowing tax revenue to selectively haemorrhage as the price it pays for the IC reforms. (The alternative would be to repeal the Personal Services Income provisions in toto, which would entail a plenary haemorrhage to the revenue.)
Such an anomaly-busting (for some) move probably won’t even need legislation to bring it about. The Personal Services Income (anti-IC) provisions cast a net that blue-collar workers find much easier to slip out of than white-collars. In particular, the milieu of the former is unlikely to blush too much in using a chain of sub- and sub-sub-contracting entities – an exercise that requires at least a wink from the ultimate “employer”. Even Workplace Relations Minister Kevin Andrews happily endorses such winks:
“[The Personal Services Income test is] easily manipulated to achieve the desired outcome.”*
Meanwhile, white-collar contractors (often IT workers) are inherently much less able to resort to such manipulations. As I’ve said, I don’t think that the new IC regime is going to significantly add to white-collar contractor numbers. But it will significantly add to white-collars’ already-disproportionate tax burden, as Western Sydney’s tradies (yesterday employees, today contractors) get to income-split and go deductions-drunk as a tacit part of the IC trade-off. To top this all off, the building industry (whose organised crime elements remain untouched, of course) gets another layer of crime added to it.
Sidebar: The Age goes loopy-Right (or maybe just loopy-loopy), again
Up to 2 million people who work as independent contractors will win greater protection under [the IC reforms]
Err, considering that even the proponents of the IC reforms say that they are about “freedom”, rather than “protection”, I really have no idea how the Age justifies its use of the p-word, no matter which side it one is viewing from. While there is still some protection, to use the adjective “greater” is a travesty, even if Kevin Andrews is indirectly quoted thus:
the legislation would protect the right of all Australians "to be their own boss". (same URL; emphasis added)
Meanwhile, the Age’s SMH stablemate has a very different spin, one that whatever one’s views on IC may be, at least has the benefit of logical concordance with a side:
Up to 200,000 workers in NSW will lose employment benefits such as paid leave and minimum pay rates under further moves to deregulate the labour market by the Federal Government.
The SMH also runs a more revealing quote from Kevin Andrews:
"State deeming laws have become so absurd that they can result in completely arbitrary distinctions. An independent contractor who drives a bus can be a deemed to be an employee while a taxi driver is not."
Yep, that’s real arbitrary, Kevin. I suppose that simple fact that taxi driving is piecework-incarnate, while bus driving is intrinsically hours-based has never crossed your tiny mind? Now politicians on piecework/IC-rates – I’d like to see that, because none of the current batch is worth a dime a day.
* Mark Skulley “Contractors get independence” AFR 23 June 2006
There’s a good reason that making it easier for employees or quasi-employees to be legally cut adrift as independent contractors has taken so long to be trotted out by the Howard government – revenue protection. As a matter of both ideology and implementation, the new independent contractor regime (“IC”) is a simpler beast than Howard’s two other, big IR-reform planks (Workchoices and tackling organised crime in the building industry). But because of its potential strongly negative effect on tax revenue, IC has long been left on the shelf.
Or arguably, even pushed way to the back of the shelf. In 2000, new Personal Services Income provisions in the tax act (Div 84 – 87 ITAA 1997) went wider than state-based industrial law, in deeming many (in practice, mainly white-collar) independent contractors to be employees (albeit for tax purposes only). The main effect of such a deeming is to: (i) limit tax deductions to those a conventional employee could claim, and (ii) absolutely prohibit income-splitting.
So what’s changed since 2000? Actually nothing, other than the newfound willingness of the Howard government to turn up the anomaly notch; or if not, run a serious revenue risk. This time, it’s hundreds of thousands of mainly blue-collar workers, who will soon find themselves presumably-reluctant converts to IC “freedom”, yet remaining under a tax regime officially premised on denying any substantive change to their status.
My prediction is that with the Howard government being so dependant on the votes of blue-collar aspirationals, it will yield to them, allowing tax revenue to selectively haemorrhage as the price it pays for the IC reforms. (The alternative would be to repeal the Personal Services Income provisions in toto, which would entail a plenary haemorrhage to the revenue.)
Such an anomaly-busting (for some) move probably won’t even need legislation to bring it about. The Personal Services Income (anti-IC) provisions cast a net that blue-collar workers find much easier to slip out of than white-collars. In particular, the milieu of the former is unlikely to blush too much in using a chain of sub- and sub-sub-contracting entities – an exercise that requires at least a wink from the ultimate “employer”. Even Workplace Relations Minister Kevin Andrews happily endorses such winks:
“[The Personal Services Income test is] easily manipulated to achieve the desired outcome.”*
Meanwhile, white-collar contractors (often IT workers) are inherently much less able to resort to such manipulations. As I’ve said, I don’t think that the new IC regime is going to significantly add to white-collar contractor numbers. But it will significantly add to white-collars’ already-disproportionate tax burden, as Western Sydney’s tradies (yesterday employees, today contractors) get to income-split and go deductions-drunk as a tacit part of the IC trade-off. To top this all off, the building industry (whose organised crime elements remain untouched, of course) gets another layer of crime added to it.
Sidebar: The Age goes loopy-Right (or maybe just loopy-loopy), again
Up to 2 million people who work as independent contractors will win greater protection under [the IC reforms]
Err, considering that even the proponents of the IC reforms say that they are about “freedom”, rather than “protection”, I really have no idea how the Age justifies its use of the p-word, no matter which side it one is viewing from. While there is still some protection, to use the adjective “greater” is a travesty, even if Kevin Andrews is indirectly quoted thus:
the legislation would protect the right of all Australians "to be their own boss". (same URL; emphasis added)
Meanwhile, the Age’s SMH stablemate has a very different spin, one that whatever one’s views on IC may be, at least has the benefit of logical concordance with a side:
Up to 200,000 workers in NSW will lose employment benefits such as paid leave and minimum pay rates under further moves to deregulate the labour market by the Federal Government.
The SMH also runs a more revealing quote from Kevin Andrews:
"State deeming laws have become so absurd that they can result in completely arbitrary distinctions. An independent contractor who drives a bus can be a deemed to be an employee while a taxi driver is not."
Yep, that’s real arbitrary, Kevin. I suppose that simple fact that taxi driving is piecework-incarnate, while bus driving is intrinsically hours-based has never crossed your tiny mind? Now politicians on piecework/IC-rates – I’d like to see that, because none of the current batch is worth a dime a day.
* Mark Skulley “Contractors get independence” AFR 23 June 2006
