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Understanding the (gig) business model

In late 2017 the ATO attacked 16 people who are earning their incomes through the gig economy. The ATO cancelled the 16 ‘transcribers’ Australian Business Numbers effectively destroying their businesses and cutting off their incomes. We fought to defend the 16 and eventually had the ABNs reinstated.

Here we explain how this case relates to the ‘gig’ economy issue.

Transcribers and the gig economy

The small business, OutScribe, is an example of the ‘gig’ economy that has emerged over the last 20 years or so. The gig economy is a way of doing business that is sweeping the world, bringing new levels of productivity and opportunity facilitated by on-line business engagement. However, it also brings challenges to established bureaucratic systems designed in and for a pre-gig economy environment. Bureaucracies naturally react against business models that challenge the bureaucracy’s administrative convenience. This includes private commercial activity that challenges the bureaucracy’s perceived expectations of how business should be run. And the bureaucracies frequently attempt to bend such new environments to their bureaucratic will.

OutScribe is an on-line, website business platform (see here). OutScribe connects people who need transcriptions done with people who do transcriptions. To give an example:

  • A research doctor is producing a report on a medical issue. The doctor orally records the report and uploads this to the OutScribe website.
  • OutScribe advertises that the work is available through its website to qualified transcribers registered with it.
  • Registered transcribers check for the work that is available and choose what work they wish to do. In this they are aware of the price for the work, roughly how long it should take to complete and the date by which the doctor needs the work back.
  • A transcriber will accept the work, complete and return it and is paid by OutScribe.
  • OutScribe charges the doctor who in turn pays OutScribe.

This is precisely the global gig business model happening with ride sharing (for example, Uber), accommodation (for example, Airbnb), manufacturing and retailing (for example, Amazon), home and other services (for example Airtasker or hundreds of websites!) and so on.

Take Uber as an example.

  • If you are registered with the Uber app, the app identifies your location and you record your required destination through the app.
  • Uber declares the cost of the trip to you upfront (with conditions).
  • Uber advertises your trip to registered Uber drives within range of your location.
  • An Uber driver accepts the advertised trip, collects and delivers you to your destination. Uber monitors the trip through its GPS system
  • You pay Uber and Uber pays the driver, less a commission to Uber.
  • If you complain to Uber about the driver, Uber may/will refund you and deduct money from the driver.    

At law there is a common feature that sets the gig economy models apart from the way work has been predominately organized since the start of the industrial revolution. In the familiar (industrial) model, the people who do the work are ‘employees’ subject at law to the ‘right to control’ of the employer.

In the gig economy, by contrast, there is no ‘employment’ and no ‘right to control’ by an employer over an employee. The contractual relationships are entirely commercial. The on-line platform business (Amazon, Uber, Airbnb, etc.) operate like stock markets. The platforms connect people wanting something, (for example, to buy shares) to people delivering something (for example, selling shares). The platforms facilitate and manage the commercial transactions including invoicing, payments and so on. Every transaction is commercial.

From the point of view of the ‘workers’, who in this case study are the transcribers, key features identify and determine that the relationships are entirely commercial and not employment. These features are:

  • Work is available on a strictly offer and acceptance basis. That is, the work is advertised on the platform, a price shown and the worker chooses if they wish to do the work. 
  • There is no ‘compulsion’ to work. Every job is stand-alone. There is no compulsion on the customer to supply work, or the platform to advertise work or the worker to do work. At every level the transactions are voluntary. This contrasts with employment where the employer has the legal right to require the employee to work (for example, to do overtime or to attend work at certain times) and the employer has the legal obligation to supply work to the worker.
  • The worker is free to work for anyone, including competitors to the on-line platform company.

So, for example, Uber drivers:

  • Watch what work is available on the app and choose the work they wish to do.
  • Work when they want to without answering to Uber.

These are precisely the core features that apply to the transcribers sourcing work through OutScribe. OutScribe is a ‘stock exchange’, gig-economy, transaction management business. No more, no less!

 

The public policy issues around this gig economy model

This gig economy model has excited regulatory reaction in different ways across the globe. Even though regulators are highly familiar with stock exchanges and see these as essential to the good functioning of an economy, many regulators are in policy panic over the same model applying in the gig economy.

The outcome is that a number of jurisdictions have sought to close down the gig model, whereas others have embraced it. There are three primary public policy issues in play, one being a competitive issue:

  • The legal state of ‘employment’ is seen as inherently ‘exploitative’ requiring regulators to stop the alleged exploitation. Where a person works outside the legal state of ‘employment’—as occurs with the gig economy model—a view has been formed by employment regulators that exploitation is (surely) occurring. They therefore seek to declare gig workers to be employees in order to bring those workers into the regulated employment environment.
  • The power of government regulators to collect revenue, either tax and/or in some jurisdictions (for example, the UK) accident/illness compensation insurance, is legislatively tied to the existence of the legal state of ‘employment’. The regulators therefore seek to declare gig workers to be employees so that the regulator can raise revenue/insurance.
  • The gig economy threatens entrenched business models. Uber, for example, threatens the taxi industry. The taxi regulators then seek to declare the gig workers to be employees so as to have jurisdiction and be able to apply their regulations.

These issues have been at play in many different jurisdictions. For example:  

Other jurisdictions are accommodating gig workers:

Part of the law prevents the app company (for example, Uber) stopping the gig workers (drivers) from working for a competitor. In other words, the law enforces the commercial model.

And, in a major development, the Australian Fair Work Commission has declared an Uber driver to not be an employee. This makes sense.

As for the Australian Taxation Office, its response to the gig economy should be accommodating. It has the legislative structure to be accommodating. This should provide Australia with a globally competitive tax administration environment to make full use of the gig economy’s opportunities.

But the evidence from the actions of the ATO in this case study of the transcribers’ ABN cancellations causes us to conclude that something else is going on in the ATO.


Understanding the significance of the employment versus contracting issue with the ATO. Integrity of the tax collection system.

A little history will help:

  • Before 2000 the Tax Commissioner only had legislative power to require income tax withholding (that is, regular payments) from (legally identified) ‘employers’ who deducted tax from (legally identified) ‘employees’. This meant that, where contractors operated, the ATO did not have the authority to collect withholding income tax. Because of this the ATO conducted aggressive campaigns to declare contractors to be employees. That is, the ATO had a vested (revenue) interest in people being employees.
  • This was fixed in 2000 with the introduction of the PAYG system. PAYG is an integrated legislative structure where:

a)     employers must pay withholding tax;

b)    contractors working directly must pay tax;

c)     where contractors are working through labour hire, the labour hire company must remit withholding tax.

  • Where contractors work directly they need an ABN which is linked to their Tax File Number (TFN). They pay tax under their Business Activity Statement and so on. Importantly, the ABN, linked to the TFN, linked to bank accounts and so on provides the ATO with an enormous capacity to match data, checking for individuals’ correct declarations of income.

The introduction of the PAYG/ABN system in 2000 gives the ATO the total legal capacity it needs to collect tax whether someone is an employee or contractor. That is, from an administrative point of view, the ATO should not be worried about individuals’ legal status because tax can be legally demanded and collected.

Importantly, this enables the gig economy to develop because contractors are within the tax collecting system and not outside. Further, it encourages tax compliance and reduces ‘black’ economy activity. The wide use of ABNs is therefore central to the integrity of the income tax collection system.

With this in mind, the ABN legislation was intentionally drafted to be exceedingly broad about who is entitled to an ABN so that it could capture emerging commercial models.

The legislation is as follows:

  • A New Tax System (Australian Business Number) Act 1999 section 8 (1) states:

“You are entitled to have an Australian Business Number if (a) you are carrying on an enterprise in Australia”

  • The term enterprise is defined in A new Tax System (Goods and Services Tax) Act 1999 sections 9-20 a:

(1)  “…an activity or series of activities done

(a)   in the form of a business or

(b)  in the form of an adventure or concern in the nature of trade”

The words ‘activity’, ‘adventure’, ‘concern’, and ‘nature of trade’ give entitlement rights to an ABN an exceedingly broad embrace, not just in a policy sense but also legislatively.

  • Further reinforcing this broadness, the definition of business under the GST Act (sect 195.1)

(c)   “includes any profession, trade, employment, vocation or calling but does not include occupation as an employee.”  (Emphasis added)

Note that the only exclusion is where someone is an employee. Therefore, it is hard to conceive of anyone who is engaged in some form of business or commercial activity in Australia not being entitled to an ABN. Under the Acts, the only exclusion from ABN entitlement is for people who work as employees.

  • This is reinforced again under A new Tax System (Goods and Services Tax) Act 1999 sections 9-20 stating:

(2)    However, enterprise does not include an activity,….done

(a)     by a person as an employee….

This legislative structure is important because it provides a practical form of securing income tax collection whilst at the same time enabling new and emerging economic models (such as the gig economy) to operate.

What this legislative model does is to give the ATO effective, investigative and ultimately enforcement powers. For example, if the ATO has a concern that income is not being declared and tax not paid where work is being done by a contractor, very simply the ATO can:

  • Go to a person’s ABN, cross-reference to the person’s TFN, check the person’s BAS or IAS (regular income declaration) or their tax return, cross-reference to bank accounts (and so on) to identify declared or undeclared income.
  • If there were continuing concerns, the ATO can obtain the business records from the individual and check invoices (and so on) and verify with the contractor’s clients what payments were made. This is what the ABN system facilitates.
  • If income were not declared, the ATO can undertake a tax assessment and place a demand for tax on the contractor.
  • If the contractor made claims of being an employee, the ATO can make demands for payment from the employer.

This is how the system was designed and is supposed to work. The ATO can collect tax no matter what the legal status involved in a business model. In fact, the original intent of the ABN system was to encourage as many people as possible who wanted an ABN to have one! (For example the Australian Business Number Act 1999 sect 3 states “….the main object of this Act includes allowing businesses to identify themselves reliably for the purposes of taxation laws.”)

But something very odd has transpired in the ATO on this issue. The OutScribe/transcribers ABN case demonstrated this. The ATO is totally out of step with the new gig economy.

 



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