IT Contractors Suffer Under New Tax Law In Australia

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

09 May 2001

Australian IT contractors have spoken out against a new tax law that they say could severely damage recruitment in the IT industry and harm up to 150,000 contractors.

The new tax law, entitled the 'Alienation of Personal Services Income,' came into effect last year as a provision of the Goods and Services Tax law. It imposed certain conditions on contractors that prevents them from earning over 80 per cent of their income from one source.

Information Technology Contract and Recruitment Association (ITCRA) executive director, Norman Lacy, told the Australian media that the law was clearly discriminatory against recruitment firms and placed contractors in a difficult position where they were at risk of being fined. 'If a change isn't made, no matter how careful and considered the Government is in introducing its reforms, the contractors are going to feel it,' Mr Lacy said.

He explained: 'Next time the contractors sit down with their tax agent they are going to find themselves either in breach of the legislation or having to make very quick arrangements to avoid being in breach, because there are penalties involved.'

To avoid clashing with the new law, contractors may decide to deal directly with employers and avoid agencies altogether. Mr Lacy added: 'Contractors may make other arrangements, such as becoming a PAYE employee rather than an incorporated contractor. That is what a lot of them are doing. They are simply opting out of working as separate companies and becoming PAYE employees. But if you are trying to minimise your tax, you do not want to do that because there are advantages in being an incorporated company and contracting through that.'

ITCRA, which represents 56 IT recruitment agencies and deals with 11,000 IT contractors - up to 80 per cent of the market - has announced plans to join the Recruitment and Consulting Services Association (RCSA). RCSA, which has 3200 members in both Australian and New Zealand, approached the Australian government last week with several alternative proposals to the troublesome tax.

'If it is going to impact on the way contractors earn their income and run their business, they will no longer use the recruitment firms as their source of contracts,' RCSA chief executive Julie Mills said. 'Contractors will go directly to clients. There will be increased costs to clients because they will have to make administration procedures to manage contractor workers.'

She said the RCSA was campaigning for a "look-through" rule to ensure that companies hiring a contractor were termed as the source of income instead of the recruitment agency. 'Everyone was so busy getting their head around GST and the impact of that, we missed the ramifications of this,' Ms Mills explained, 'but it is clear there is going to be a huge impact on businesses in this industry.'

ITCRA representatives have met with senior officers of the Australian Tax Office (ATO) to discuss the interpretation of key provisions of the 'Alienation of Personal Services' legislation. Commenting on the outcome of the meeting, president of ITCRA, Geoff Moles, said that the ATO had agreed to work with ITCRA to bring greater clarity to the situation that agencies and incorporated contractors faced. He said: 'It is clear from the discussions that the intention behind the contested legislative provisions was to deal with inappropriate income splitting not to change the taxation regime for those who are working within the current ATO guidelines. The ATO has undertaken to work with us on the framing of a set of clarifying statements based on public rulings that are soon to be released.'

'However,' added Mr Moles, 'in cooperation with other industry bodies, we will continue to seek a political solution to the discrimination we believe still remain.'

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