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.
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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.