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 10/07/01

Transcript No. 2001/091

 

TRANSCRIPT
of
HON PETER COSTELLO MP
Treasurer

Interview with Neil Mitchell
3AW

Tuesday, 10 July 2001
10.00 am

SUBJECTS: Contractors

MITCHELL:

I said earlier, back to the issue of contractors and the tax system, my comments at the opening of the program were strong. The Federal Treasurer, Peter Costello, has requested the right of reply. He is on the line. Mr Costello, good morning.

TREASURER:

Good morning Neil.

MITCHELL:

One call this morning crystalised this for me when a young man, Steve, a contractor, said this is my dream to work for myself and the Government is going to stop me. Can that change your mind?

TREASURER:

Well he can work as a contractor, because the legislation recognises the right of all independent contractors to do so. And I think its important that we get the facts out Neil. You said at the beginning that your comments were strong, you actually said the Government was showing the brutality of a rapist with a gun.

MITCHELL:

Conning us.

TREASURER:

And, well that is what you said, a rapist with a gun. And I dont think that adds to the debate Neil, obviously I dont think it is a substitute for the facts, and...

MITCHELL:

But this is brutal Treasurer.

TREASURER:

...thats the reason. Well, I dont know whether, particularly your female listeners, will think that thats the way...

MITCHELL:

Let me worry about that. Let me worry about that. The point is this is brutal...

TREASURER:

...will think that thats a fair thing to say. Look, we are discussing...

MITCHELL:

This is brutal and you can, the Government and the Tax Office under this system can lurch out at individual contractors who think they are doing the right thing at any time and penalise them. It is brutal.

TREASURER:

Well, as I was saying Neil, I dont think that is the right language to use. I dont think it is fair, obviously, and I dont think it elucidates the issue at all. And that is the reason why I think I should set the record straight there. The second thing is you read out a, what you said was a headline from the Financial Review. It wasnt, it was a quote from the Labor Party.

MITCHELL:

It was a headline in the Financial Review.

TREASURER:

Well, it was a quote from the Labor Party.

MITCHELL:

Used in a headline in the Financial Review.

TREASURER:

But you said this is, the Financial Review, hardly a radical journal. So I think that it is also important to put that on the record, and I make those two points.

MITCHELL:

Ok. Fair enough.

TREASURER:

In relation to contractors Neil, any person who is a genuine independent contractor does not have their status changed.

MITCHELL:

What is a genuine independent contractor? And how do you determine it without...

TREASURER:

A genuine independent contractor is somebody who is contracted for a result and liable for rectification. This is a test which has been in the common law now for decades if not centuries. And its this difference. That if you are a carpenter, for example, you are contracted to put up a frame on a house and you dont do it properly, the contractor is called back and has to fix it at his own cost. An employee who is pulled back to fix up the frame continues to receive wages. Because an employee is paid a wage they do not contract for a job.

MITCHELL:

Is this now the only test that you require to be met?

TREASURER:

That is the principal test. And if you cant meet that test...

MITCHELL:

But, what about, how many other tests have you got?

TREASURER:

Let me go on, if you cant meet that test which is the genuine test of independent contractors there are other tests which may help you further. But that is the principal test. The question is, how do you assess it? We say people can assess themselves in the same way that theyve been assessing themselves now since time immemorial.

MITCHELL:

But, Mr Costello, the world has moved along greatly from the era of carpenters, and contractors only being carpenters with frames to fix. It is now far more complex than that.

TREASURER:

Sure.

MITCHELL:

And I would suggest your Government has been one of those who has encouraged the more flexible work system. Now the effect of your changes is to punish those people who are having a go.

TREASURER:

That is not the effect. The effect of these changes is that anybody who is a genuine independent contractor is recognised. But Neil, youve got the other problem. There are a lot of employees out there that turn up for work and receive a wage and pay their salary. And they wonder why the bloke sitting on the next door desk to them receives his income through a trust or company which he is able to split it with wife and children...

MITCHELL:

And pay significant amounts of his own costs such as Work Cover, such as superannuation...

TREASURER:

Not necessarily.

MITCHELL:

Well, hes got to follow the laws if he is going to do that. There is a long argument that there is no benefit in being a blasted contractor.

TREASURER:

If there are no tests of being a genuine independent contractor, you know, Ill turn up to work tomorrow as a personal trust and the bloke on the factory floor will turn up tomorrow as a personal trust, and theyll split their income. And the other thing where this falls, of course, is claim their home mortgage as a tax deduction.

MITCHELL:

Now, why are they getting their home mortgage as a tax deduction? For a home office?

TREASURER:

No. Anybody can claim a home office, even an employee can claim a home office. But if you have a business office, then you are entitled to deduct the interest costs.

MITCHELL:

Lets look at the generalities. Look,..

TREASURER:

No. Neil, lets look at the specifics, if I may, because...

MITCHELL:

Alright, the specifics are disgraceful as well, if you want to look at the specifics because things are so confusing that any person who takes the risk of self-assessing themselves is going to live in continual fear of the Tax Office coming down and saying, well we knew you were trying to be honest, but youve done the wrong thing, heres the fine, heres the penalty - pay up. Now, thats the position youve put every contractor in.

TREASURER:

No. We dont. That is the position they are in today. Every contractor today is self-assessed. You said earlier, you are a contractor, you are self-assessing today. Every contractor today is self-assessing.

MITCHELL:

Not under this absurd set of rules that you have now drafted, which the tax accountants cant understand, Mr Costello.

TREASURER:

No, what you are self assessing against today is the common law.

MITCHELL:

Well, you have now added above that, you have now added to that the most complex and absurd set of regulations which makes it impossible for people to determine what they are, who they are or why they are.

TREASURER:

No, Neil, not so. What you are self-assessing against today is the common law. You are self-assessing on the basis of court judgements which have been handed down over decades. That is what you are self-assessing against. What we have done is we have taken the simple test in relation to independent contractors. Do you contract for the job? Are you liable for rectification? And you can self assess against that. Now, you say, oh well, if people get it wrong under self-assessment they can be liable for back tax. That is the situation today.

MITCHELL:

However, Mr Costello...

TREASURER:

That is the situation. Everybody is self-assessing today.

MITCHELL:

However, you have introduced a whole new layer here of regulation, of legislation, which is going to complicate that entirely. Bob Gottliebsen in The Australian today makes exactly that point, its so complex the Tax Department doesnt understand it, the accountants dont understand it, the politicians clearly dont understand it. What hope is there that the average contractor is going to have any confidence in doing anything about it?

TREASURER:

Neil, when you say it is complex. Ive got it in front of me. It is one section, the results test is one section, and it replaces common law judgements which are tens, hundreds of pages long. Now, youve always had this test in the common law. What weve said is if you are a genuine contractor, people know if they are a genuine contractors.

The difference between a genuine contractor is somebody who is out, self reliant, giving it a go as compared to the person who previously worked as an employee, still works for the same person, but now says, its not my income it is my trusts income or my companys income and I can split it, I can claim a place of business and deduct my mortgage...

MITCHELL:

Do you accept...

TREASURER:

...and there are many people...

MITCHELL:

Yes, youve been through this.

TREASURER:

...the other side of this Neil, is there are many people who are working as employees and are paying their fair share of tax. A lot of times...

MITCHELL:

Are you saying contractors are not paying their fair share of tax?

TREASURER:

No.

MITCHELL:

Well, that is what you are saying by inference. You say the worker is, the contractor isnt. And that is the whole essence of what you are doing here. You dont understand.

TREASURER:

No, Im not saying that.

MITCHELL:

You just said it.

TREASURER:

No, no, Neil. No, Im not saying that. Let me make it entirely clear.

MITCHELL:

You just said it. Yes, you did.

TREASURER:

Im saying independent contractors are not affected by this legislation.

MITCHELL:

Alright. Are they paying their share of tax?

TREASURER:

What I am saying is, people who have formerly been employees who continue to work for the same person under the same terms and conditions do not become contractors just because they say they are. And you have to have a legal test of what is the contractor. The contractor has been reduced in the legislation essentially to people who contract for results, and this is very similar to what the common law test was. They are liable for rectification.

MITCHELL:

How do you apply rectification to the modern world? If youve got a PR consultant. How do they rectify? They dont get a story in the paper.

TREASURER:

Well, PR consultants...

MITCHELL:

If youve got an IT consultant. How do they allow for rectification?

TREASURER:

Well, an IT consultant is somebody who will contract to produce some software or some computing. They will generally speaking have a lump sum -I will do such and such a job for you for $40,000 or $50,000. If the software doesnt work I dont come out and fix it on a wage. I have got to go back and I have got to fix it myself. It is part of the lump sum contract.

MITCHELL:

Is it possible, are you seriously saying it is possible to define rectification in the whole number of industries which now cover, are covered by contractors? The courier...

TREASURER:

Yes. Now come to the courier...

MITCHELL:

You have suddenly given an exemption to...

TREASURER:

No we havent.

MITCHELL:

Oh yes you have.

TREASURER:

This is a very important point Neil...

MITCHELL:

(inaudible) got your press release here (inaudible) suddenly an exemption.

TREASURER:

No. No we havent. This is a very, very important point. We have not suddenly given an exemption.

MITCHELL:

Yes you have.

TREASURER:

The courier was never covered. This was the point I was making last night. Now, it is very important that we get the...

MITCHELL:

Do you read the Tax Office ruling on it? It was covered!

TREASURER:

Hang on, it is very important...

MITCHELL:

Did you read that Tax Office ruling?

TREASURER:

It is very important that we get the facts out here.

MITCHELL:

The Tax Office said he was covered, Mr Costello.

TREASURER:

Hang on.

MITCHELL:

Did you read that?

TREASURER:

Neil its, I have read the Tax Office, I have read the Tax Office...

MITCHELL:

Well, it said that the courier was covered. You have suddenly given him an exemption.

TREASURER:

No. No Neil, can I just get the facts out because I think it is very, very important here that, you know, there is areas of misunderstanding.

MITCHELL:

My oath there are, thats the whole problem here, Treasurer.

TREASURER:

No, that is the problem with the law as it currently exists.

MITCHELL:

Oh.

TREASURER:

This has been the problem with the law now for 20 or 30 years.

MITCHELL:

Why have you suddenly exempted the courier?

TREASURER:

No.

MITCHELL:

I think they should be exempt but you have suddenly done it?

TREASURER:

In relation to the courier, a person who brings their plant or equipment, such as their semi-trailer or their truck, and derives income from their truck or their semi-trailer is not covered. Has not been covered, that has been in the ruling. Whats more, if they are a genuine, independent contractor, that is they contract for the delivery, right? I will deliver the goods from A to B for $20 or $50, they are contracting for the delivery. They are not in the situation of the person who says, Ill drive wherever you want me, and here is my daily wage, or my weekly wage, or my monthly wage. They are genuine contractors. Its not a change. Thats the point I am making...

MITCHELL:

I respectfully suggest to you...

TREASURER:

...if they are contracting for the job, if they are liable if they dont get it there on time...

MITCHELL:

It is a significant...

TREASURER:

...if they have to back and rectify it they are not on wages. They are contractors. The point I keep coming back to, is this legislation does not affect general, genuine, bona fide contractors. The change that we announced, was, we said you can go to the Tax Office and have your status clarified. Thats what we said and they said we dont want to go to the Tax Office, we dont want to fill in those long forms, and the change that we announced yesterday was, you dont have to go to the Tax Office and get your status clarified. If you dont want to, you can self-assess, as you have self-assessed in the past. And so people can take that decision without having to fill in the forms. That is the change we announced. Look, the HIA welcomed it...

MITCHELL:

(inaudible)

TREASURER:

...most of the bodies welcomed it...

MITCHELL:

Well, the Tax Accountants Association doesnt, the Tax Payers Association doesnt, a number of individual organisations do not, and certainly most commentators do not.

TREASURER:

I think that the Tax Payers Association, by and large, represents wage and salary earners, incidentally.

MITCHELL:

Well, theyre not supporting it. Theyre not supporting it. They say it was...

TREASURER:

Well, because a lot of wage and salary earners...

MITCHELL:

Meaningless window dressing they say, Mr Costello.

TREASURER:

There are a lot of wage and salary earners, I dont know, you know there is another side to this. A lot of wage and salary earners think that the Government has got to be honest in its attempt to protect them as well. And that is...

MITCHELL:

Well, the people who represent them say it is meaningless window dressing...

TREASURER:

If everybody can suddenly split their income...

MITCHELL:

...meaningless window dressing.

TREASURER:

If everybody can suddenly split their income, then every wage and salary earner should be entitled to do it, now thats fair.

MITCHELL:

You have now given an exemption to financial planners, you have done the same thing, I would argue, for the truck drivers and couriers. Who is next?

TREASURER:

All independent contractors.

MITCHELL:

Why is it?

TREASURER:

All independent contractors are exempted. It is not a question of who is next. Every single, genuine, independent contractor is not affected. What this measure is targeted at Neil, and as you have seen it, if somebody who is really a wage and salary earner, has always been a wage and salary earner, who says that...

MITCHELL:

I understand what youre trying to do, my point is youre not doing it.

TREASURER:

...from now on what I want to do they say...

MITCHELL:

...youre not doing it...

TREASURER:

...from now on what I want to do, they say, is I want to split my income. I might want to deduct my mortgage, why cant I do it? Everybody else is doing it and the answer is you cant do it because you are not a genuine, independent contractor. And you have got to draw the line between people who are and who arent and this legislation does not affect genuine, independent contractors. And the change that we announced yesterday was that they can self-assess.

MITCHELL:

Okay, I just make that point again that what you have got is a bad law, a bad act, a confusing, confused piece of writing which will put contractors in a terribly vulnerable position in trying to self-assess.

TREASURER:

Okay, well the point I make is this: contractors at the moment are self assessing. There has been no change. If you reckon that they are vulnerable, they have been vulnerable for 10 or 20 or 30 years...

MITCHELL:

Then dont aggravate it.

TREASURER:

And what we have actually done is we have put in place a measure which will protect the genuine wage and salary earner, and the genuine independent contractor, and draw a line between the two.

MITCHELL:

Is this the final version of it?

TREASURER:

Yes.

MITCHELL:

No change?

TREASURER:

No. This is...

MITCHELL:

The Prime Minister told me that on Friday and you changed it on Monday.

TREASURER:

Well, hang on. What, I think what the Prime Minister said to you on Friday, was that he would look at any of these matters, particularly in relation to compliance burdens. He did over the weekend, the Government announced what I consider to be a dramatic easing of the compliance burden on Monday, and I think he made good on what he said to you.

MITCHELL:

Is there any possibility, is there any possibility, as is being argued, of delaying it a year, or at least dropping the retrospectivity?

TREASURER:

Neil, when you say retrospectivity, again, this legislation came into effect for the 1 July 2000 financial year.

MITCHELL:

Yes, the last financial year.

TREASURER:

And it was passed before that year commenced.

MITCHELL:

Yep.

TREASURER:

Its not retrospective.

MITCHELL:

But isn't that part of the whole problem. It wasnt understood, it wasnt examined because everybody was so snowed under by the BAS and the GST, including the accountants, nobody had the faintest idea what was going on.

TREASURER:

Yeah, can...

MITCHELL:

And it has only just dawned on them.

TREASURER:

Can we agree on this point, it is not retrospective?

MITCHELL:

No. It is retrospective because you have just changed it, and yet it is applied to the previous year.

TREASURER:

Hang on. It was passed...

MITCHELL:

You have just changed it yesterday...

TREASURER:

Hang on, it was passed...

MITCHELL:

Yesterday, Mr Costello.

TREASURER:

It was passed prior to 1 July 2000.

MITCHELL:

You introduced a change yesterday which applies to the previous financial year.

TREASURER:

With application...

MITCHELL:

Well of course that affects people because they will have made decisions based on what they interpreted your changes to be and now you have changed your changes.

TREASURER:

Okay, well look...

MITCHELL:

Have you not?

TREASURER:

...Neil all I will say, and I obviously I cant convince you out of your view, but if the legislation was passed prior to 1 July and has applied from 1 July, in any understanding of legislation it is not retrospective.

MITCHELL:

And you changed it yesterday.

TREASURER:

Yesterday what we said is the legislation applies, but you can self-assess.

MITCHELL:

You changed the system yesterday, Mr Costello, and that must be retrospective.

TREASURER:

Yesterday, we said you can self-assess against the legislation.

MITCHELL:

Okay. Thank you for your time.

TREASURER:

Great pleasure Neil, thanks.

MITCHELL:

Will we see you on Thursday?

TREASURER:

Love to, love to come out and discuss with you about other things.

MITCHELL:

Thank you very much.

TREASURER:

Okay.