Tax laws bite contractors

CONTRACTORS and consultants who provide professional services through companies, partnerships or trusts are in for a nasty tax surprise.

Those working through labour hire firms face particular issues.

New tax laws known as the alienation of personal services income measures mean contractors will not be treated as businesses for tax purposes.

These provisions treat contractors who earn more than 80 per cent of their income from the one source as employees. Contractors working through labour hire firms are hit because all or most of their income is from the one source – the labour hire firm. Simply swapping to other labour hire firms will not necessarily solve the problem.

By being treated as an employee, these contractors lose any business tax benefits they might have enjoyed. If they earn more than $60,001 per year they could be taxed at the highest marginal tax rate of 47 per cent instead of the company rate of 34 per cent.

Sources within the labour hire industry fear this could cause a lot of work to be done overseas that otherwise would have been done in WA.

They say these provisions will force them or their clients to take on the contractors as employees – adding between 20 per cent and 25 per cent to their costs.

Jackson McDonald tax consultant Graham Harrison, who worked on the Ralph Review of Business Taxation, has been hired by several labour hire firms and their industry associations to lobby Government to change the laws.

“It was business’ understanding that genuine independent contractors would not be caught up by the personal services income measures,” he said.

“We’re seeing a clash between the Government’s tax policy and its labour policy. Its goal of creating a more flexible labour market is being threatened by tax measures that simply haven’t been thought through.”

The alienation provisions could also bite some financial planners.

Financial planners operating under an authority from licenced securities dealers face similar problems because all of their fees come through that licenced person.

Financial Planners Association manager public policy Con Hristodoulidis said that under Corporations Law to be a financial planner you either needed to be licenced by the Australian Securities and Investments Commission or operate on the authority of a licenced securities dealer.

“If they are operating under licence, they have to operate as a ‘natural person’,” Mr Hristodoulidis said.

But because the law requires them to be a “natural person”, the ATO ignores the corporate structures and considers them to be individuals for tax purposes.

“Then the planner gets hit by the 80 per cent rule because the licencee collects his or her money from the licence holder,” Mr Hristodoulidis said.

ATO assistant commissioner small business Tony Sullivan said tax officers were producing a draft ruling on how the alienation of income provisions would affect contractors. The draft would be available for comment within a few weeks.

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