Retrospective tax fear with personal services alienation

THE Federal Government’s decision to allow contractors to self-assess whether they are alienating personal services income could open them up to large retrospective tax bills.

The Government’s decision is yet to be ratified by the Senate.

Industry and accounting bodies are calling on the Australian Tax Office to get the Alienation of Personal Services Income provision rules right first.

Before the change, contractors earning more than 80 per cent of their income from a single source had to seek a private ruling from the Australian Tax Office or be treated as employees for tax purposes. This made them ineligible to claim many legitimate deductions and be taxed at the higher marginal tax rates.

Jackson McDonald tax counsel Graham Harrison said contractors would find it very hard to self-assess.

“The legislation is very complex. Even tax professionals have prob-lems with it,” Mr Harrison said.

CPA Australia senior tax consultant Garry Addison said there was a risk contractors would be lulled into a false sense of security by the self-assessment regime.

“There is a danger, further down the track, that there could be a whole slew of audits and these contractors will be facing a big tax bill plus penalties and interest if they have self-assessed incorrectly,” Mr Addison said.

“Our advice to contractors is if they are uncertain they should seek a determination from the tax office.

“Prior to the alienation rules there was nothing. These rules were supposed to make things clearer. Now we’ve taken a backward step.”

Recruitment and Consulting Services Association president Malcolm Jackman said the Government’s announcement did not address the fundamental issues the labour hire industry had with the legislation.

Contractors operating through labour hire firms were prime targets for the alienation provision. Even though they serviced many clients, the bulk of their money usually came from the labour hire firm.

“Just because contractors can now self-assess to determine whether they qualify as personal services businesses doesn’t alleviate the problems for the agencies,” Mr Jackman said.

“We believe there will still be confusion in people’s minds about what is allowed and what isn’t. And clearly, according to the legislation, using an agency will still disqualify many contractors from passing the personal services business test.”

However, Housing Industry Association chief executive John Dastlik is happy with the Govern-ment’s decision because their self-assessment approach adopts a lot of the proposals his organisation put forward.

“I feel this will resolve a lot of headaches for a lot of businesses – not just those in the housing industry,” Mr Dastlik said.

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