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From the Desk of the Executive Director

Ken Phillips is co-founder and Executive Director of Independent Contractors of Australia. He is a published authority on independent contractor issues and directs research on related commercial and trade practices issues. Through his numerous articles in newspapers and think-tank and academic journals, Ken is known for approaching issues from outside normal perspectives and is frequently sought out for media comment.

Shot by Gillard's red-tape gun

Wednesday, May 11, 2011

It's hard not to come to the conclusion that the Gillard government is determined to suppress the capacity of people to be self-employed. The budget contains the latest hit against independent contractors as explained by Robert Gottliebsen.

This new measure is allegedly aimed to improve tax compliance by contractors. But it's doing this by requiring self-employed people and those who engage them to comply with the ATO's massive new reporting regime. With both parties now obliged to comply, every commercial transaction between self-employed people and their clients will have to be reported to the ATO, twice.

The government says that the ATO will then data match to check if tax is being paid.

The new regime is to start in construction and move out from there. Imagine this---every plumber, carpenter, brickie, engineer, draftsman and architect will have to take copies of every invoice and supply these to the ATO. Every home-builder, earthmover and construction firm will have to do the same, including invoices they receive and send.

The number of records to be sent to the ATO defies comprehension, certainly in the hundreds of millions. When the new rules eventually spread to every independent contractor, that's 1.1 million people. But it goes further. Independent contractors are businesses of one. Add in self-employed people who employ and that's another million people. Put it all together and we're looking at the beginning of the biggest, 'big brother,' red tape trawling exercise ever contemplated by an Australian government. Why?

Assistant Treasurer Bill Shorten says it's about tax compliance. But the facts don't support Shortens' reasoning. The allegation that self-employed people ripped off the system has been around for over a decade. But the only solid research done on the topic showed this view was grossly incorrect.

During 1997 and 1998, the ATO identified 65,000 independent contractors they profiled for investigation. In all, 55,000 tax return reviews were initiated, 5,403 taxpayers received special targeting and 1,104 tax agents were visited. The result? Just 714 taxpayers received tax adjustments notices many obtaining a refund for over payment of tax. Where people had to pay more tax the increases varied from an additional 1.9 per cent to 11.6 per cent per taxpayer. Reports are that the additional tax raised was below that expected of any random audit of taxpayers' returns. That is, independent contractors were (and are) not rorting the tax system.

Nevertheless the Howard government tightened the tax system further against independent contractors through the Personal Services Income tax laws. These laws are settled and effective. Yet the Gillard government is not happy. In 2009, the government initiated a review by the Board of Taxation. It produced no evidence that could challenge the findings of the 1998 ATO audit.

But the review recommended the introduction of a hugely complex transaction reporting system very much like what Swan revealed in his budget this week. This has happened even though Bill Shorten indicated in 2010 that they would not do this.

From the perspective of self-employed people the agenda the government is pushing is quite different to one concerned with ensuring a fair tax system.

In the year to August 2010, trade union membership dropped by another 47,300 to 18 per cent of the workforce. Independent contractor numbers increased by 100,000 around the same time. Total self-employment now sits at around 21 per cent of the workforce. This is a trend that attacks the core political base of the Gillard government.

Unions' real power does not sit in their actual membership numbers. Instead, through the industrial relations system, unions have legal jurisdiction over the entire workforce but this only extends to employees. As more people become self-employed, unions power drops. It's long been a union agenda to stop this. A key mechanism is revealed in this budget.

The complex reporting system to be imposed on independent contractors will massively increase the transactions costs of being self-employed or doing business with self-employed people. This, the unions presumably hope, will cause businesses to not deal with self-employed people and shift to employees. They are probably correct. If they can deny self-employed people clients, they force people to be employees.

That's why the firing of this red tape 'gun' by the Gillard government amounts to a declaration of war by stealth against self-employed people.

If this explanation proves true, then forget about tax issues! Forget about the encouraging of entrepreneurship from small business people. Forget about welcoming diversity and individuality into how our society approaches work. Think only of self-interested political power, raw and naked.

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