Why taxing independent contractors is a sleeper election issue: Gottliebsen

The Western Australians have picked up that their widespread practice of independent contracting is under threat. Just this week I had a call from Andrew O’Connor of ABC radio in Perth who had seen my weekend Business Spectator commentary and wanted elaboration.

We are now five days into the election campaign and Tony Abbott has put forward his position, promising that the present independent contracting rules will stay.

However, despite requests from the Independent Contractors Association, the government’s position remains that they plan to turn most independent contractors into employees in accordance with the recommendations of Assistant Treasurer Nick Sherry earlier this year.

It’s an issue that will become a thorn in Julia Gillard’s side, as some 212,000 of Australia’s independent contractors in the Sherry gun live in 20 marginal seats* across the nation, including three key WA seats – Hasluck, Stirling and Swan.

It’s not an issue that’s presently getting a lot of attention from the print press, and a number of readers have asked me to explain the present legalisation that dictate when a person is classified as an employee and when they can enjoy the benefits of being an independent contractor.

To be a contractor, people must pass the so-called personal services income (PSI) tests. The first PSI test is called the “results” test where you are asked three questions: Is your income paid to achieve a specified result or outcome? Do you have to provide any necessary tools or equipment (if any) to do the work?, and Are you liable for rectifying defects in the work?

If, in a given income year, 75% or more of your personal services income meets all three conditions, you pass the “results” test for that year and your operation is declared a business.

If you fail the “results” test you can apply the ’80/20′ test. To pass this test you cannot receive more than 80% of your income from one client. In addition you must have unrelated clients; or employ people; or have a separate business premises.

These are tough, but fair tests and because of their clarity the Australian Tax Office has been winning cases in the courts because people who were employees did not pass the tests

Under the plan endorsed by Senator Sherry, independent contractors in Australia, such as plumbers or computer consultants, will need to differentiate between their income from capital (spanners, shovels and computers) and their income from labour (digging the ditches and writing software).

The part of the income derived from labour would be attributed to the person who supplied the labour and those people would be treated as employees – not business people. The income earned on capital could be returned to the owner(s) of the capital, which may differ from the person who provided the labour. To be classified as a contractors it appears you would need to employ labour.

The Sherry plan is the sleeper issue in the campaign. It is never mentioned as a serious issue when newspapers list the issues. But the sleeper is starting to awake.

* Other marginal seats where independent contractors are a significant force are – Bass (Tas); Bennelong (NSW); Bowman (Qld); Braddon (Tas); Corangamite (Vic); Cowper (NSW); Deakin (Vic); Dickson (Qld); Flynn (Qld); ; Herbert (Qld); LaTrobe (Vic); Macarthur (NSW); McEwen (Vic); Paterson (NSW); Robertson (NSW); Solomon (NT); and Sturt (SA).

This article first appeared on Business Spectator.