Summary and comment
We’re pleased to report that there might be some potential tax wins for self-employed people. These include:
- Stopping ABN discrimination
- Fixing the ATO employee-contractor ‘tool’
- Simplifying PSI rules
- Removing the 10% rule.
See below for details and more.
In early 2014, the Small Business Minister Bruce Billson commissioned the Board of Taxation to review the ATO’s administration of small business.
Independent Contractors Australia made a strong and ‘robust’ submission using evidence from a lot of our members about the treatment they had received from the ATO. It’s not a good picture! Here’s our submission.
In our submission we commented, in particular, on the following issues:
- Allocation and refusal to allocate Australian Business Numbers.
- Failures in relation to basic, core administrative functions.
- Failure of ATO officers to comply with the ATO’s own rules.
- Poor policy in relation to compliance in the construction sector.
- An ATO dispute resolution system that is not seen to be open and fair and which allows the ATO to win its claims by commercial intimidation. That is, small business people cannot afford to challenge the ATO because of the costs of litigation.
- Incoherent application of policy in relation to Personal Services Income Tax laws.
Specifically we asked for:
- Active application of a genuine, independent disputes mediation mechanism. We believe this should be the Federal Small Business Commissioner.
- Cessation of the ATO denying individuals ABNs.
- Closing down of the ATO employee-contractor online ‘decision making’ tool.
- Fixing of the poor ATO administration of small taxpayers’ issues.
- Proper, correct and consistent application of the ATO’s own rules on PSI by its officers.
- Fixing of the ATO’s construction industry reporting program
The Report’s Recommendations: Contractor vs Employee
The Board of Taxation’s report is written in most polite bureaucratic language, but within this style still makes some strong criticisms of the ATO and strong recommendations for change.
These recommendations include:
- Fixing (in their words ‘relaxing’) the ABN requirements.
- Fixing the employee-contractor tool (again in the BOT’s words “The Board endorses the ATO review of the tool”).
- Rationalising and simplifying the PSI rules (this is really linked to contractor-employee distinctions).
There were many other recommendations, but the ones above are core to our (ICA) campaign and agenda.
One area we were pleased to see recommended and where we didn’t make comment in our submission was the recommendation to remove the ‘10% rule’. This rule says that if you earn income from a mix of employment and contracting, that you are denied normal entitlements to full superannuation contribution deductions that everyone else in the community is entitled to. That is, it’s another form of discrimination against independent contractors.
Excerpts from the Board of Taxation Report
The following are direct extracts from the BOT report. (Emphasis added by ICA.)
According to ATO statistics, small businesses make up the vast majority of businesses in Australia (around 97.5 per cent), with around 2.7 million turnover of $2 million or less. By contrast, the ATO reports only around 72,000 businesses with turnover between $2 million and $5 million.
According to ATO statistics, around
- 36 per cent as sole traders,
- 13 per cent as partnerships,
- 23 per cent as trusts
- 28 per cent as companies.
Although small businesses are an important source of employment, small businesses tend to be non-employing, have very few employees or are mainly operated by family members. According to ABS data, around
- 61 per cent small businesses are non-employing,
- 28 per cent between one and four employees and
- 10 per cent between 5 and 19 employees.4
Australian Business Number
4.8 The ATO has published guidance on the meaning of ‘carrying on an enterprise’ for the purposes of entitlement to an ABN to include doing anything in the course of the commencement or termination of the enterprise.15 The Commissioner interprets this definition by describing the kind of activities undertaken, without consideration given to the outcomes of those activities.
4.9 The term ‘activity, or series or activities’, which is central to the definition of enterprise, is not legislatively defined. In its guidance, the ATO states that ‘if the activities have the character of those ordinarily undertaken to commence an enterprise they will be accepted as falling within the statutory definition’.16
However, for many small businesses, the prescriptive interpretation of what constitutes an activity, or a series of activities, for the purpose of commencing an enterprise may pose problems for ABN registration. For example, many small businesses, particularly sole traders, do not need to, nor have the capacity to, undertake feasibility studies or develop business plans which are examples of activities listed in the ATO guidance material to establish the intention of intending to carry on an enterprise.
4.10 The main submission which addressed the administration of the ABR and the ABN registration process was from Independent Contractors Australia (ICA). ICA expressed concern with the current operation of the employee/contractor decision tool and implications for ABN registration.
4.11 Other stakeholders focused on the difficulty in establishing when an applicant for an ABN is intending to carry on an enterprise. Typically, this issue will arise for an individual wishing to carry on an enterprise as a sole trader but who is unable to provide evidence that he or she is carrying on an enterprise. Stakeholders also expressed frustration at the time taken to process an ABN application, often when the applicant has had a previous ABN cancelled by the ATO, and the lack of transparency around the registration process.
4.18 The difficulty for some small businesses in obtaining an ABN can be a barrier for small businesses when they are most vulnerable in the start-up phase. This can have significant ramifications such as not being able to obtain a business name, being ineligible to obtain business inputs at wholesale prices and being unable to claim input tax credits.
4.22 In this context, the Board considers that there may be opportunities to relax the ABN registration process requirements for individuals and partnerships wishing to start a business. In addition, the inability of a business to rely on results of a search of the ABR imposes, in the Board’s view, an unreasonable impediment to small businesses.
The Board recommends that:
- The ATO revise Miscellaneous Taxation Ruling MT 2006/1 and other guidance material to include activities which will evidence that an applicant is intending to carry on an enterprise and is therefore eligible for an ABN.
Employee/contractor decision tool
The Board recognises the complexities faced by some small businesses in deciding whether an employment or contracting relationship exists in particular circumstances. The Board endorses the ATO review of the tool and commends the ATO for its responsiveness to the stakeholder concerns
The Board recommends, as part of the ATO’s review of the operation of the tool:
- it considers how the tool could better reflect or provide guidance in circumstances where a person is working through an interposed entity (company or trust); and
- it considers incorporating into the tool its guidance on who is an ‘employee’ for SG purposes to provide more certainty for employers in respect of their SG obligations.
The Personal Services Income rules
4.48 Concerns about the PSI rules appear to be closely linked to broader issues regarding the employee/contractor distinction. While there have always been threshold issues in distinguishing employees and contractors, the proliferation of contractual work arrangements in recent years means that these issues have become more prevalent over time.
4.49 The profile of Australian workers is also evolving more generally, with more ‘white-collar’ workers adopting forms of contracting and self-employment in many sectors such as management consultancy and financial services. Closely connected to the proliferation of contractors is the growth in the provision of personal services.
4.50 Similarly to employees and contractors, the distinction between an individual operating a personal services business and working in an ‘employee-like’ capacity is not always clear. The use of multiple self-assessment tests may not always address this ambiguity, creating uncertainty for individuals in assessing their need to comply with the PSI rules.
4.52 Recognising that employment structures and work patterns evolve over time (with contracting and other forms of self-employment becoming increasingly widespread in the Australian workforce), the rules regulating the taxation of such arrangements should also adapt to ensure that it is as simple as possible for individuals to identify the character of their income for tax purposes. Noting the complex nature of the PSI regime, there may be scope to simplify and rationalise the existing tests to deliver greater certainty for individuals undertaking self-assessment.
Activity Statements: Recommendation 4.6
The Board recommends that the ATO, and its relevant advisory groups, review whether the quarterly reporting obligations for small businesses could be significantly simplified including whether at the end of each financial year businesses could complete a combined Income Tax Return and Annual Business Activity Statement based on the same data.
Non-Compliance warnings. Board’s Observations
4.85 However, the Board considers that there is scope for improving administrative processes to provide greater comfort to directors that they are not going to receive a DPN without warning. The ATO has undertaken to modify the ‘Firmer Action Warning Letter’ sent to the authorised tax representative of a company to incorporate information about the impending DPN. Further, the notice should make it clear that the authorised representative should be communicating with all the directors to resolve the issues. The Board endorses these proposed changes.
Deductibility of superannuation contributions for self-employed
5.65 The self-employed are not required to make superannuation contributions for themselves, however, they are encouraged to do so by tax concessions. For example, concessional contributions can be claimed as a tax deduction, within caps. However, to be eligible to claim a deduction the person must earn no more than 10 per cent of their income from employment services and have contacted their superannuation fund advising they wish to claim a deduction for the contributions they have made.33 This restriction is intended to ensure that a person is essentially self-employed. Some stakeholders consider that the restriction should be removed or that the threshold should be increased.
Board’s Observation *** 10% rule
5.68 The Board considers that there is equity and merit in aligning the total annual superannuation concessional contributions cap for employees and the self-employed. The cost to revenue of making that alignment would of course be needed to be taken into account. That is, regardless of employment status a person can contribute or have contributions made on their behalf up to the ‘concessional contributions cap’. For a person who receives employer SG contributions, the amount of deductible personal contributions the person can make will be the applicable contributions cap less the SG contributions paid on their behalf.34