Date posted: 3/07/2020 4 min read

Levelling the playing field between employees and contractors

The tax treatment of employees and personal services contractors is vastly different. Does it need revising?

In Brief

  • Should Australia’s recently announced review of the industrial relations system be extended to include contractors?
  • The latest OECD taxing wages report urges governments to examine how the tax system encourages contracting
  • The Black Economy Taskforce made several recommendations on this issue, not all of which were accepted

By Susan Franks, Senior Tax Advocate Chartered Accountants Australia and New Zealand

CA ANZ strongly supports the Australian Government’s review of the industrial relations system. 

Many members have communicated the difficulty small businesses, particularly in hospitality, have in interpreting and applying the complex award structures. 

The business sector would appreciate any simplification of awards, which would assist in the proper remuneration of employees. 

The Australian Small Business and Family Ombudsman has gone even further and recommended that there be a single small business award that has a single category for all staff, irrespective of duties, with a single minimum hourly rate and loadings for weekend, public holidays, and late nights. It will be interesting to see the responses to this idea. 

However, it is not just the traditional employer/employee industrial relations system that needs revising. The differing treatments of employees vs gig economy vs service contractors also need consideration.

A recently released OECD Taxing Wages report notes that “across OECD countries, growing shares of workers earn income outside of traditional employee‑employer relationships ... [and that] policymakers should consider the extent to which differences in tax treatment across working types may contribute as well … tax and benefit systems may need to be reformed to ensure that they do not unduly incentivise firms to hire workers as self‑employed.”

The Black Economy Taskforce (BET) had similar concerns and noted that sham contracting was rewarded through the unequal taxation and regulation of employees versus contractors. 

The BET heard evidence that some industry sector business models rely on using contractors rather than employees. This means that these businesses do not need to pay superannuation or pay-as-you-go withholding tax despite there being little substantive difference between the role of the employee and contractor. 

The BET made several recommendations to help reduce this gap – namely expanding the taxable payments reporting regime (TPRS) and revising the alienation of personal service income (APSI) rules.

The Government has already implemented the BET recommendation to expand TPRS from building and construction to transport, security, cleaning and information technology. 

The government is exploring a sharing economy reporting regime (another BET recommendation) to ensure that those that operate outside the usual employee/employer relationship return income appropriately.

Clearly there's a need. For example, Treasury has estimated that in 2017, Australia's sharing economy was worth A$15.1 billion and that 10.8 million Australians earned income from participating in the sharing economy. These figures will have significantly increased with the rapid growth in the sharing economy. 

The TPRS and proposed sharing economy reporting regimes currently are reporting systems, not withholding systems.  However, should analysis show that those who are subject to these regimes are not paying their tax as and when required, then calls for more frequent reporting and some level of withholding are likely to be heard in Canberra. 

One of the few recommendations of the BET the government did not agree to was recommendation 10.2 “that the government should review the alienation of personal service income (APSI) rules and reconsider the options for reform canvassed by the Board of Taxation [in its 2009 report] and that the ATO should undertake a test case to resolve uncertainty and contention about how the APSI rules work.”

The APSI rules deal not with the absence of reporting income, but rather "ensuring that the taxation of personal services income applies equally, regardless of the arrangements under which the income is earned, and that neither ‘business-like’ deductions, income splitting nor tax deferral are available to entities that are not genuinely conducting a business enterprise," according to the Board of Taxation's Post Implementation Review into the Alienation of Personal Services Income Rules report.

Part of the reason for not adopting this recommendation is that the ATO is preparing to update guidance on the application of APSI rules based on cases since the start of the rules. CA ANZ understands that the ATO is updating its guidance products for APSI.   

It is not clear whether updating the ATO guidance material will be enough. The 2009 Board of Taxation report described these provisions as not providing an acceptable level of integrity and equity.

The Board therefore recommended that alternatives to meet the policy intent of improved integrity and equity be considered. The 2010 Henry review agreed and a 2013 Australian National Audit Office review recommended that further work be done to estimate the magnitude of the problem. 

In looking at alienation of personal services income, the models in Australia have focused on the role of the labour supplier. 

The United Kingdom has taken a different approach. Under its off-payroll rules, all public sector authorities and medium and large-sized private sector clients are responsible for deciding if the rules apply. This reduces the number of entities that the tax authority is required to review.  

Dealing with APSI rules will not be easy and could create substantial political pain. But stagnating wages, an increased focus on limiting work-related deductions, and increased sensitivity about tax inequities due to perceived "artificial" structures may mean this is an area that cannot be ignored. 

OECD Taxing Wages report

Report on the OECD average tax wedge for the single worker earning the average wage

Read more

Treasury consultation paper on the sharing economy

A sharing economy reporting regime - Tackling the black economy

Read more

Board of Taxations Post Implementation Review

Board of Taxation's Post Implementation Review into the Alienation of Personal Services Income Rules report

Read more