home | mini yahoo | email
How can I help you ?
Aussies dump IR35

Costello buckles to contractors' demands

Individual contractors who faced paying personal income tax from July 1 have been given a reprieve, with the Treasurer, Mr Peter Costello, relaxing the original plans for the new tax provision.

Legislation for the crackdown on contractors was presented to a hastily called party-room meeting last night and will be introduced in Parliament today. The changes will allow contractors to continue paying company tax even when they earn more than 80 per cent of their income from one source.

The concessions are aimed primarily at information technology start-ups, consultants and the building industry and follow intense lobbying by backbenchers, industry groups and ministers.

The concessions in the legislation were negotiated because of the extreme sensitivity on the Liberal Party back benches over a law that could alienate key constituent groups.

But the concessions could come at a significant cost to the Budget, as the crackdown on contractors was originally designed to raise $500 million a year from 2000-01.

Mr Costello told a meeting of the party room last night that a contractor would have to satisfy only one of four criteria to avoid having to apply for a special ruling from the Tax Office to avoid personal income tax.

The criteria comprise:

* Having a business premises.

* Having two or more unrelated clients.

* Being able to satisfy the Taxation Commissioner that the entity is not a loss-making operation and that tools of trade are supplied, which could include a mobile or a laptop.

* The entity has one or more employees who perform at least 20 per cent of the work.

Also, new businesses which may have only one client will be able to seek special dispensation from the Commissioner for Taxation for a transition period of up to two years. In these cases, the commissioner will make a declaration exempting the new business from the tests.

Backbenchers raised concerns about the impact of the new system when Mr Costello briefed a special party meeting yesterday evening.

In particular, they were worried about the impact on the budding new-economy industries and on the road transport and building industries.

Mr Costello circulated a paper on the concessions and spoke at length about the particular problems raised, such as the impact on subcontractors in the building industry and new dot com businesses in the IT field.

In the end, the party approved the legislation, with Mr Costello promising to take on board some of the other concerns. But the Government believes the commissioner's determinations will be able to address any potential anomalies.

The Ralph report had proposed that when a contractor went over the 80 per cent threshold, the contractor would have to obtain a special ruling from the Tax Office. It warned that the crackdown was needed because the growth of contractors, which had been five times the rate of employment growth for the past two decades, posed a major threat to the revenue base.

The transitional measures outlined by Mr Costello, which apply for two years, mean that most contractors will not be required to apply for a special ruling. A major reason for this was that the ATO was not going to be able to supply the rulings given its workload associated with implementing the GST new tax system.

The Housing Industry Association had warned that in the building industry alone, more than 100,000 contractors would be forced to obtain a ruling. This would present a significant additional workload on the Tax Office, which has an estimated 1.5 million Australian business number applications to process by July 1. Already 1 million have been issued.

The HIA warned the Government that the crackdown on personal services income loomed as a bigger compliance burden for the building industry than the GST.

The Minister for Employment and Workplace Relations, Mr Peter Reith, was lobbied by the housing industry and has held concerns for many years about the industrial-relations implications of such a crackdown.

HIA pressure led the Government to abandon draft legislation in its first Budget that would have applied personal income tax to tens of thousands of contractors.

Louise Dodson and Paul Cleary with Chelsea Martin and FionaBuffini

Thursday, 13 Apr 2000 copied from the Australian Financial Review