When doing their tax returns over the next few weeks, up to 1.4 million Australians are likely to discover that they may be denied tax deductions they received last year, not because they have done anything different but because the rules have changed.
The Ralph review of tax estimated that under new alienation rules 3/4s of unincorporated and 1/4 of incorporated contractors affected by the legislation would be denied $3,000 a year in tax deductions. Further, that 3/4 of incorporated contractors would be denied $6,000. If these figures can be believed up to $5.5 billion in previously allowed deductions may be denied.
This is occurring because Australian tax officials have successfully promoted the view to all political parties that the alienation measures clean up a huge and broad-based tax scam. However it's also probable that, like the initial implementation of the BAS, the ATO have got it wrong. And like a bad meal, inaccurate perceptions by tax officials are likely to politically damage the government and repeat itself on future governments that fail to understand.
According to the Australian Bureau of Statistics, 20% of working Australians are now self employed, independent contractors. 590,000 are incorporated and 1,078,000 are unincorporated. This is a huge increase from about 3% ten years ago. Can all these Australians be tax cheats? Or, is the ATO like King Johns' tax collectors, convinced they see a Robin Hood behind every tree in Sherwood forest and if so why?
The old tax system was constructed on the administrative presumption that nearly every individual income earner was employed. And Australia's tax administrators have historically displayed a near obsessive fixation that contractors somehow are ripping off the system. This is reinforced by industrial relations attitudes that illogically see evil in contracting.
The outcome is that the tax system has a cultural problem. It's clashing with a rapidly shifting community culture in the work environment in which Australians are rejecting the managerial authoritarianism of employment. People want the freedom of controlling their own work.
Tax officials are all "employed". Their life's view of work is experienced through the narrow prism of government employment bureaucracy. They understand the administration of business but not the dynamism of business. They understand the administrative process of big business but not the immense flurry of activity that is small business. Their narrow view of the work world is the core problem that hit the government in the BAS face.
When the BAS was conceived it had all the elements and intent of a simplified system. But in its application the ATO's desire for transaction cross-referencing consumed the simplicity. A one-page form masked the massive information gathering and collating exercise needed to fill out each square. For big business this was fine. But for small business, especially the shoe box brigade who were used to taking all their paperwork to an accountant once a year, the task was overwhelming. Now this has been eased and arguably better recording will lead to better business.
However the problem is not over because the tax collection community still has not grasped the reality of the new work world. They still do not understand small business and contractors and refuse to confront clear truths.
Look at the evidence. The animosity to contractors had its seeds in the ATO's income tax collection powers being tied to common law employment. As people became contractors the ATO could not collect tax at source and had to invent PPS. This problem has been fixed under PAYG to the benefit of all. However the debate over contractors' entitlement to tax deductions continues. Tax officials seem to maintain the view that contractors illegitimately split income and claim unfair deductions. Is this view valid?
No, according to the only authoritative, case study investigation done of contractors tax claims and structures. In 1988 the ATO itself conducted an 18-month audit of 65,000 independent contractors profiled as likely tax avoiders. Only 714 persons were issued additional tax notices and with only small tax variations applied. Shrimps were netted instead of tuna. The audit conclusion was that contractors structure their affairs for legitimate business purposes, not for tax avoidance.
Almost scandalously however, this key audit report was buried and not highlighted in the Ralph review discussion on alienation. Is it that tax officials don't want the facts to interfere with their long held bias? If this is the case any government of any political persuasion who aggresses against contractors without honestly seeking the truth risks being bitten hard.
On the ATO's own research the alienation problem is comparatively minor. But instead the ATO's application of the government's legislative intent to close loopholes is looking like an aggressive anti-contractor attack.
Take the ATO's own example cited on their web site. A person building furniture and selling their product through a shop will be treated like a business and entitled to business tax deductions. But an IT consultant building software programs for sale through an IT company will not be treated like a business and will be denied tax deductions. The only difference between the two is that the carpenter deals in tangibles while the IT consultant deals in intellectual property. The problem is not the IT consultant but the ATO's inability to grasp a changing world of work.
Also caught in the net are people who use agency type arrangements as a convenient administrative conduit to managing payments. This includes traditional and IT style labour hire people and financial advisers to name some. No matter how many clients these contractors have, when they use an agency they fail the 80% rule and lose legitimate and normal business deductions.
It's clearly a nonsense and the government faces another possible BAS style debacle driven by the frustration of up to 1.4 million voters.
Importantly, the community needs facts. An authoritative analysis of the cultural shift away from employment needs to be completed as the starting point to realistic policy progression. As a player with a vested interest the ATO is not impartial.
ADVERTISEMENT
No comments:
Post a Comment