Australian Contractors Hit By Taxation As Employees

by Mary Swire, Tax-News.com, Hong Kong

06 July 2001

Last year Australia mirrored the UK in introducing legislation to tighten up on small contractors who are deemed to have what amounts to an employment relationship but use 'personal service companies' or self-employment to minimise their tax bills.

In the UK, the legislation known as IR35 created a storm of protest and a judicial challenge which failed. Many contractors, particularly in the IT sector, are supposed to have fled the country rather than submit to the new rules.

In Australia, the legislation is called 'Alienation of personal services income tax' and applied from 1st July 2000. Perhaps because of the introduction of the GST and the hated Business Activity Statement, many contractors don't seem to have noticed the new rules, and may now be liable for additional tax plus penalties because they have breached the law.

Contractors aren't the only ones not to have noticed until it was too late: part of the Government's liberalising agenda has been to encourage the growth of self-employment, and the new tax rules are squarely opposed to that. Minister for Workplace Relations Tony Abbott is said to be very sympathetic to Housing Industry Association (HIA) officials who say that the new rules make the housing industry vulnerable to building unions because they will force thousands of subcontractors to be reclassified as employees who will have to be paid award wages and conditions.

Treasury estimated that the average additional tax bill would be A$2,000, but the HIA - whose members aren't subject to the law until next year - says that it will be nearer to $6,000 in most cases.

The Government is expecting to gain an extra $1.4 billion in tax over four years by forcing about 230,000 contractors to pay more tax, but it's now clear that it will be at the cost of undermining the Government's industrial relations policies, which encourage people to pursue contract-based work.

Like the GST, and other changes to the tax system, the 'Alienation' legislation was supposed to be a mid-term measure which would be sufficiently far away from the next election not to frighten the horses. Now it seems that the weight of unpopular legislation has been so great that the shock waves from it will have a direct and negative effect on the coalition's chances next spring.

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