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Fake contractors gouging our tax base: unions

Australia is facing an ongoing drain on tax revenue as a result of the failure of the Howard Government’s attempts to prevent “bogus contracting” from undermining the tax base, according to data produced by the CFMEU.

While instinctively supportive of independent contractors as a source of “Howard’s battler” style blue-collar conservatism, the previous Government understood that the growth of contracting represented a direct threat to the tax base through the business deductions contractors could claim and the difference between personal and company tax rates.

The 1999 Ralph Review had identified the need for better regulation of contracting to prevent it posing a serious threat to the tax base.

The issue brought Treasurer Peter Costello and Workplace Relations Minister Peter Reith into conflict as Costello worked on bills implementing the new GST-based tax system in 1999 and 2000 (when Reith was moved to Defence). Reith argued that contractors were a major and growing constituency that the Government should be supporting, rather than regulating, and won. The resulting New Business Tax System (Alienation of Personal Services Income) Act 2000, introduced by Costello in April 2000, was a watered-down version of what Ralph had identified as necessary.

At the time, Costello said “the government estimates that the alienation measure will result in increased revenue of $190 million in 2000-01 financial year, $290 million in 2001-02, $435 million in 2002-03 and $515 million in 2003-04.” This was less than Costello himself had anticipated five months before.

The extent to which Costello’s revenue predictions have been borne out aren’t clear. The ATO has not released any data on the success or otherwise of the personal services income measures. But in 2004, an ATO official told a Senate committee non-compliance in the construction industry was a “significant” and in fact “severe” problem.

The Board of Taxation, the business-dominated body that oversights the Tax Office, is currently conducting a review of the implementation of the Costello rules. And figures unearthed by the CFMEU as part of its submission suggest there is tax avoidance on a massive scale in the construction industry.

The CFMEU is hardly unbiased on such issues. The construction industry is the largest sector for contracting, and the rise of independent contracting has loosened the union’s grip on the industry and reduced its potential membership. Nevertheless, the evidence unearthed by the union raised huge questions about what the Tax Office is doing.

According to CFMEU head John Sutton, of about 900,000 people employed in the construction industry, between 400,000 and 500,000 are contractors, and of those, in its estimate, two-thirds are “bogus contractors”. To support their claim, the union points to:

ABS data from 2008 that shows 115,000 contractors are “labourers” who can contract nothing but their own labour services. In March this year, the ATO stopped providing new Australian Business Numbers to “labourers” who in the ATO’s words “by their very nature…are considered employees” for Commonwealth taxation purposes.

The union also points out that of 312,000 “independent contractors” in construction, half did not have more than one contract.

Amazingly, until March this year, apprentices and even schoolchildren were able to obtain ABNs to work as contractors. In 2003, the Australian National Audit Office had criticised the Tax Office for being too liberal with ABNs. The audit found over 10,000 ABN holders had self-described themselves in applications as “labourers” or “apprentices”.

The ANAO also noted that the ATO was aware of “an increasing propensity in job advertisements for employers to require applicants to have an ABN.”

That is, in a reversal of the rule from the days of a union-dominated construction industry: no ABN, no start.

This “propensity” has accelerated in recent years. The CFMEU found hundreds of thousands of construction industry job ads that required ABNs or incorporated entities, including many in metropolitan newspapers.

Backpackers, 457-visa holders and foreign students are all users of ABNs. For some it is an easy way to avoid tax; others are coerced into becoming contractors.

The UK Treasury has dealt with exactly the same issue of the shift from employees to contractors in construction and only last month released an estimate that the British Government was losing £350m a year from the construction sector based on industry data that shows remarkable similarities to that from Australian. According to the CFMEU, applying the same data to the Australian construction industry suggests the Australian Government is losing at least $230 million a year.

As Sutton explained to Crikey, the proliferation of the use of contractors puts enormous pressure on construction industry employers who aim to fulfil all their obligations to employees by paying award rates and requirements like superannuation. “They’ll have costs of $50 a man-hour versus $30 for someone who uses contractors. Some young men, they get $30 cash an hour and they’re happy, they live like there’s no tomorrow. But you get older people, near forty, who gets sick of not being able to take a holiday with their families, or have realised they’ve got no super, and they want to move to a job with proper pay and conditions and they can’t.”

Sutton acknowledges that the issue of who is a contractor and who is an employee can be complex. “Don’t worry about the hard cases. You get a carpenter who works on multiple jobs in the construction industry, is he a contractor, is he a worker – it’s hard to tell. Don’t worry about that. We want something done about the easy cases – the apprentices and labourers and backpackers and 457 visas who simply can’t be businesses.”

This Government, like its predecessor, fancies itself as being able to attract the support of contractors. But the sight of $200+m a year walking out the door might get a Government deep in deficit to take action on unscrupulous employers and employees exploiting Peter Costello’s weak laws.

5
  • 1
    TheOtherMichaelT
    Posted Wednesday, 26 August 2009 at 2:21 pm | Permalink

    Well there are a few issues here, but it basically comes down to people simply cheating on their taxes.

    For example, i don’t see any reason why anyone shouldn’t be able to setup a company and have that company derive income (through whoever’s labour).

    The problem then is what to do with the money in the business. If you’re a ‘one man band contractor’ the money eventually has to get paid from the company, to yourself, in the form of wages, which are taxed as per usual. And (from what i understand) you legally have to pay into your superannuation.

    You can’t just spend the business money on personal holidays and expenses (groceries, hitech toys, mortgage, rent) etc. Doing so is simply tax fraud, just like someone putting in a $10,000 work related expense on their E-Tax form.

    Of cours the union angle in any of this is very clear (and is pointed out in the article), and should be dismissed as usual propaganda against workers who don’t wish to be under the yoke.

  • 2
    Heathdon McGregor
    Posted Wednesday, 26 August 2009 at 3:27 pm | Permalink

    A lot of my tradesman friends have this set up where they work as a subcontractor to a larger company. As they have a lot of work they act like an employee but are taxed different.

    My real concern for my friends is when there is not as much work and they lose income and need to deal with centrelink. They may discover the taxes they saved/stole were not worth it.

  • 3
    MAREE WHITTON
    Posted Wednesday, 26 August 2009 at 4:33 pm | Permalink

    Most employers who insist on employees holding ABN’s are saving money. They do this to save on Workers Compensation, Super Payments, PAYG, Holiday Pay, Shift Allowances.
    Also, the Tax Office already lists the following as prerequisites- 1. 80% Rule, you cannot derive more than 80% of your income from one Contractor. 2. The Taxpayer must be responsible for decisions and results of contract including the fixing of mistakes. 3. The Contractor must supply own equipment and tools. 4. Contractor must receive fee for work completion and not hours worked.
    But this tax dodge is only the tip of the iceberg. The cash industry has never been held accountable. How many coffee, bread, food shops can anyone think of in an instant that never put money into a properly recording register. The shop where I take my mending to and the Pizza Restaurant I attend neither has EFTPOS or credit card facilities or a proper recording register. These businesses have ‘Cash only” sales for one thing to cheat the taxman. Most of these businesses only have casual staff and pay in cash, hence no tax from these people as well.
    The only taxpayers forced to pay their rightful tax are PAYG taxpayers and small business.
    There are dozens of ways collection of taxes can be more effective and equitable.

  • 4
    Jim Wright
    Posted Wednesday, 26 August 2009 at 5:04 pm | Permalink

    I am a little concerned that the business of contracting is mainly as a tax rort. Being a contractor is a business and should be regarded as such. I recently retired after 25 years as a contractor in the IT industry. As some posts have pointed out, you do have responsibilities with regard to PAYG and so forth, but you do have (or should have ! ) income higher than an employee to cover such overheads. The only thing I found a real bind was the time lost to GST and similar procedures. A small company may have about the same number of transactions a year as a big compnay, though the amounts of course are much smaller. The big company can afford to have a person dedicated to this task, whereas the contracto may lose valuable paying time.
    From my perspective there were a lot of advantages in being a contractor.
    * I can buy a car under favourable terms, as I work in other peoples offices.
    * I can buy complex computer equipment to keep up to date with the technology
    * I can invest surplus income before tax instead of after tax.
    * If an employer wants me towork additional (unpaid) hours, i can simply say “why
    should I give my time for free when another client will pay me ofr that same time ?”
    * If I develop software or hardware, it is my own copyright or patent. The position is
    much less clear if I am an employee creating stuff that relates to the employers business
    in my own time.
    As is so often the case, it depends upon how good you are at running the business side of things. I suspect that a lot of tax rorts (let us say non-payments) arose out of the inability of the contractor to keep up with the formal responsibilities of running a business.

  • 5
    Richard Jacobs
    Posted Thursday, 27 August 2009 at 12:00 pm | Permalink

    If Mr Sutton of the CFMEU is genuinely concerned about loss of tax revenue by ABN quoters his problem could be easily addressed by requiring payers to ABN holders to report payment details regularly to the ATO.

    Payers to normal Tax File numbers must regularly report. Try quoting a dud TFN and the ATO will be onto it almost immediately.

    This would solve Mr Suttons problem. It would also keep happy those who cannot see any advantage in Mr Sutton and his ilk lifting their power base by sucking on workers wallets as a compulsory income earning condition. As soon as unionism became voluntary these parasites power based disappeared at an amazing rate - around 90% thought they got no value from them.

    Tax laws apply the same to all - its a popular furphy they do not, but they do. There are no more tax deductions available to ABN holders than there are to TFN holders. Its all about compulsory unionism, and offering to cut the ALP in on a share of the increased union fees will ensure Kev07s support.

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