The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Peter Costello

Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Transcript of 09/07/01

Transcript No. 2001/090

TRANSCRIPT
of
HON PETER COSTELLO MP
Treasurer

Doorstop Interview
Ministerial entrance foyer, Parliament House
Monday, 9 July 2001
4pm

SUBJECTS: Alienation of Personal Services Income, Aston, One Nation

TREASURER:

Well today I am announcing on behalf of the Government measures to significantly ease the compliance burden under the alienation of personal service income provisions. Under those provisions, where youve been an independent contractor who does, who derives more than 80 per cent of their income from the one source, you had to apply to the Tax Commissioner for a personal service business determination, that is you had to go to the Tax Commissioner and seek that determination. And the change which the Government is announcing today is that independent contractors can self assess. If you are an independent contractor who contracts for a result, and is liable for rectification, if you bring your own tools of trade if they are required then you can self assess as a personal services business. You dont have to apply for a determination. You can if you want to, if you want a safe harbour, but you are not required to, you can self assess as you have self assessed in the past. And what that means is that you dont have to fill in a form asking for a determination and you dont have to go through that compliance burden, you can continue the self assessment for now. The essence of these measures are not to apply to independent contractors. It has never been intended to apply to independent contractors. What they are is an integrity measure so that people who really aren't in business cant claim that they are and on the basis of claiming that they are in business, split their income or treat their mortgage interest payments as deductible. Now one of the issues thats come up for independent contractors is, we are independent contractors, we recognise we are because we contract for rectification, why do we have to get a determination, the Government is announcing today that you dont have to get a determination, you can self assess as you have assessed in the past. That will ease the compliance burden for the independent contractor, whilst at the same time ensuring that integrity measures are preserved so that every person who has hitherto been paying on a PAYE basis cant go out and claim they are a business and take advantage of additional deductions.

JOURNALIST:

So is that supposed to be a neutral fiscal impact, or what would it be?

TREASURER:

We estimate that the fiscal impact will be as previously announced because the object of the determination was so that every person who was an independent contractor would get a determination. Now what were saying is every person who is an independent contractor can self assess and you are an independent contractor if you can track the result and you are liable for rectification. This has always been a very unclear area of the law, since the last two centuries of court decisions. What is the difference between somebody who is on a salary and somebody who is business where they dont have tools of trade, where they dont have an office, where they only really work for one person, how do you recognise that theyre actually in a business. The principle way you recognise it is if you are contractor you are liable for rectification, you do the job badly you have got to go and make it good, if youre an employee you are not liable for rectification, you might get in trouble with the boss, but you dont have to go back and rectify the work and you are not liable for the damages if you do. So we maintain the legal distinction between the contractor and the employee, but we dramatically reduce the compliance burden, you no longer have to get a determination, you are able to self assess as youve been self assessing in the past.

JOURNALIST:

So what do self employees (inaudible) as contractors?

TREASURER:

Well if an employee self assesses them as a contractor, and at law theyre not, they will be liable for their proper tax liabilities. Like any other employee. All employees self assess at the moment, an employee who self assesses on the basis for example of a deduction that they are not entitled to, will be liable for back taxes. A person who assesses as a business when they are actually an employee will be similarly liable for back taxes, but you wont have to go through the rigmarole of putting in an application and seeking a determination and hence the compliance burden is dramatically eased.

JOURNALIST:

The Tax Office (inaudible)...

TREASURER:

Sorry?

JOURNALIST:

Will there be any relaxation of the 80/20 rule?

TREASURER:

Look, the 80/20 rule is a rule that says where you dont have a number of clients, and youre not an independent contractor on other grounds that is an indicator that you are not in business. But if you are a contractor on other grounds, in this case you are liable for rectification, youre paid for the result, you bring your own tools of trade, you provide, then you are recognised as an independent contractor regardless.

JOURNALIST:

Why did you allow the Tax Office to design the system this way?

TREASURER:

Let me make this point, this was recommended not by the Tax Office but by John Ralph, senior Australian businessman and a Committee of Business actually recommended this, John Ralph, Bob Joss and the third member of the Business Taxation, Rick Allert. This was actually recommended by John Ralph, Bob Joss and Rick Allert. Now I dont think any of those people will be pleased if you described them as the Tax Office. What they recognised ...

JOURNALIST:

(inaudible) a totally different way of doing it...

TREASURER:

What they recognised is that if every employee were allowed to claim that they were a contractor, split their income and deduct their home mortgage, then you wouldnt have much of a tax system left. So that you had to have mechanisms for preventing that. What the Government introduced was significantly less rigorous than was recommended by Ralph. And the Labor Party condemned the measures that the Government introduced for being too weak. The Australian Democrats moved amendments to toughen the test and the Labor Party moved a Second Reading amendment condemning us for such weak legislation. The legislation that was introduced. And now we take it a step further to reduce the compliance burden. But I want you to remember this, the Labor Party condemned the existing legislation, not what I am announcing today, but the existing legislation as too weak and they condemned it on the basis that it was substantially less than had been asked for by John Ralph. Not from the Tax Office, but from John Ralph so let us have a clear little chess board here, Sid, as to who was where on the chess board before we jump to too many conclusions.

JOURNALIST:

Treasurer, has anyones tax ...

TREASURER:

Sorry?

JOURNALIST:

Treasurer has anyones tax liability changed by todays decision by Cabinet?

TREASURER:

No person who honestly self assesses would have fallen foul of the previous measures and they wont fall foul of these measures.

JOURNALIST:

So without (inaudible) these measures because people were self assessing incorrectly under the old system and therefore seemed to be ripping the system off, so if we let them self assess now, then whats the difference?

TREASURER:

No, Ralph recommended these measures because he said if you dont put a legislative test in place then every employee in the country will say they are a business person, split their income and deduct their home mortgage.

JOURNALIST:

(inaudible)

TREASURER:

Now we have put in place the legislative test, but in order to activate that you had to get a determination. Now you can self assess against that legislative test. You dont have to go through putting in the application, running through the gauntlet of the Tax Office which they dont want to do. So you now have the legislative test which clarifies the area, which means that no genuine, independent contractor will fall foul of these measures, and that whats more they can self assess and dont have to go through the rigmarole of doing that.

JOURNALIST:

(inaudible)...the whole problem is people werent honest in the first place so how can you, (inaudible) how do you think they will honestly self assess?

TREASURER:

No, the whole problem was that without this legislation, Part 4A was the mechanism that the Tax Office had at its disposal. That was the problem. Now if you are going to launch Part 4A actions, which the Tax Office had never done, you could have enforced the law. But what this, was recommended was you actually put it into a test so that you had a proper legislative basis for administration. That you were not forced back on to Part 4A in individual cases, and I think actually if contractors had the choice of having Part 4A exercised against them or a legislative test which they can self assess against, I think they would go for the legislative test every single time.

JOURNALIST:

Treasurer (inaudible)...concern that business has about this particular measure? Do you think that this will be enough to satisfy their concerns about concerns that have been raised over recent weeks?

TREASURER:

Well, I think so because we have discussed these measures in quite a lot of detail, and particularly with the HIA, and on the 5th May 2000 the HIA expressed its deep gratitude for the legislative test. That was year ago, now it then changed its position and on the 18th May 2001, 12 months later, said well we still agree with the legislative test but can you allow self assessment? So they supported the legislative test and expressed deep gratitude in May 2000. They went a step further by 2001 and said can you allow self assessment? We have allowed self assessment as well, so as far as the HIA is concerned its got a 100 per cent strike rate...

JOURNALIST:

(inaudible)

TREASURER:

...and you cant do much better than that. In fact there was 100 per cent first time and then they had another strike and got 100 per cent second time too, so you cant do...

JOURNALIST:

What extent do you think this decision will have an impact on the Aston by-election?

TREASURER:

Well I think most people in Aston are probably wage and salary earners who were not affected by this one way or the other. You have got to remember that there are two ways of looking at this. The first is if you are a wage and salary earner who sees somebody who sits at the next door desk in the office, working for the same person, splitting their income, and deducting their mortgage interest costs because last week they used to be an employee but this week they decided that they were in business. And a lot of employees say, well, how can that happen, if they can do it why cant I? And that is why we introduced the legislative test.

JOURNALIST:

(inaudible)

TREASURER:

It was the legislative test to actually say you cant do that unless you happen to be a genuine, independent contractor. Now, prior to todays announcement if you wanted to take advantage of the genuine, independent contractor you had to apply in advance for a determination, and a lot of the people said that is a long form, we dont want to fill it in. We think if you allow them to self assess, remember, everybody should remember of course that under a self assessment system if you are not entitled to treat yourself as an independent contractor you are liable for back taxes, there is sufficient integrity in the statutory test to prevent that from happening. So, I think a lot of wage and salary earners would say we commend this Government for doing this, it had to be done. I think a lot of people in business said, would say, we understand where you are going but by requiring us to get an advanced determination you put a compliance burden on us, and they would say and we think that you have listened to that problem and we are glad that now you have taken that compliance burden off.

JOURNALIST:

(inaudible)... survive a loss in Aston?

TREASURER:

Well, of course the Coalition can survive a loss in Aston because the Coalition will be made and broken according to the votes of all Australians. Its not just one electorate that decides the outcome. But the Labor Party is the favourite, they know theyre the favourite. Kim Beazley reckons he has got it in the bag, privately. He would be very happy that he is getting the One Nation preferences. One Nation is preferencing the Labor Party in front of the Liberal Party in Aston, so Mr Beazley is no doubt hoping he is going to get home on One Nation preferences in Aston, he reckons he has a pretty good chance to do so. And all I can say to the people of Aston is this. I say this very genuinely. You have seen a bloke who for 5 years told us that he wanted to get elected to introduce a Knowledge Nation and now you have seen the Knowledge Nation - spaghetti and meatballs. Do not reward that laziness because it is that kind of laziness in economic policy that will lead to higher interest rates. Its that kind of laziness that will lead to worse job prospects for your kids. Its that kind of laziness that will mean that the Government will not be able to run the decent social security system. Beazley wants Aston voters to reward laziness. And I say even if you are thinking of voting Labor send him a message. Send him this message, Beazley, if you want to be Prime Minister do some work. Do some work and try and earn our votes. Thats the message that the Labor leaning voters in Aston should be taking.

JOURNALIST:

(inaudible)...your fourth major backdown on tax since February, Mr Costello, how do you think voters in Aston will view that (inaudible) your decision today?

TREASURER:

Well, this is an improvement of legislation which goes to the integrity of the income tax system and if this legislation hadnt been put in place, as it wasnt under 13 years of Labor Party government, then the tax system would be very much the poorer for it.

JOURNALIST:

(inaudible)

TREASURER:

We take, we take, we are not at all shy about saying we do all the hard work. You know, we put this in place, we take submissions, we improve things. But, if the alternative to that is the-do-nothing Labor Party we say you will get better results under this. And, you know, we are very happy to take on the big issues, the hard issues, to take on public concern and to deal with it. We are very hard about that.

JOURNALIST:

(inaudible)...merger between NAB and Abbey National?

TREASURER:

If anything is to be said in relation to that I expect the National Australia Bank will say it.