11 March 1996 - 3 December 2007
Alienation of Personal Services Income
The Governemt introduced into Parliament today a Bill to prevent individuals reducing their tax by diverting income generated by their personal services to a company, partnership or trust and to limit work related deductions available in those cases.
This is an important measure to enhance the integrity of the taxation system which I foreshadowed in the Governements response to the Ralph Report recommendations which I announced on 11 November 1999
These measures ensure that the tax system is operating fairly for all taxpayers and protect the revenue base.They are in accordance with the Ralph review recommendations and in line with our commitments on revenue neutrality.
To counter alienation of personal services income, earnings from work will be treated the same way for all taxpayers, regardless of whether the income is earned through a company or other entity, or earned directly by the individual.
The measures will not affect genuine independent contractors.
Entities that earn 80 per cent of their income from one source will require a determination from the Commissioner that they are a personal services business. The Bill sets out the tests that will allow the Commissioner to determine whether an entity is running a business.
The Bill makes it clear that the measures will not deem an individual to be an employee for the purposes of other legislation or industrial award. The legal status of the entity is not affected in any way.
The legislation limits the deductions that individuals or entities that are not running a personal services business can make, but it also makes clear that individuals or entities that are entitled to claim business related deductions under current tax arrangements, will still be entitled to claim these deductions. For example, deductions for workers compensation and the costs of obtaining work will continue to be allowed.
The measures will apply from 1 July 2000. The Government recognises that this is a time when business will be settling in to the new tax system and has introduced transitional arrangements to minimise the compliance burden on taxpayers. The Commissioner will be able to make a declaration so that the measure will not apply to contractors under the Prescribed Payments System who have payee declarations with the Commissioner as of today. The Commissioners declaration can apply until 1 July 2002.
CONTACT : Nigel Bailey (02) 6263 3766