Tony Ince, Mostyn Consulting

It seems like the ATO is getting ready to go into battle on the employee/contractor with their rather aggressive position statement. ATO Deputy Commissioner Steve Vesperman, in a recent (February 2016) press release, said there are many myths about employee/contractor arrangements, and that it is important for all businesses to get the distinction right.

“We know from our own field work that many businesses are getting the employee or contractor decision wrong, and often this is just not knowing what determines one from the other,” Mr Vesperman said.

Incorrectly treating employees as contractors is a problem in many industries, in particular the building and construction, cleaning, road transport and security industries.

Mr Vesperman said while most business tried to do the right thing, some businesses deliberately treated their employees as contractors to illegally lower their labour costs by not withholding tax or paying the super guarantee.

The following are the ATO’s views in relation to some “myths” about employee v contractors. My views are also included.

Myth # 1: If the worker has an ABN, they’re a contractor.

ATO view: Having an ABN makes no difference, and will not make your worker a contractor for a job. If the working arrangement is employment, whether your worker has or quotes an ABN will not make them a contractor.

Tony’s view: Having an ABN is only one factor, and certainly not determinative. It does, however, show some intent by the worker to be considered a contractor. Make sure your contractors do have an ABN.

Myth #2: If the worker only works for short periods, they’re a contractor.

ATO view: Just because work is short term or irregular makes no difference and will not make your worker a contractor for a job. The working arrangement determines whether they are an employee or a contractor, not the amount of time they work for you.

Tony’s view: Short term or irregular work suggests a more flexible working arrangement more akin to a contract. But it is the working conditions that will determine the legal status of the working arrangement.

Myth #3: If others in my industry are doing the same, then my worker is a contractor.

ATO view: Industry practices make no difference and will not make any of your workers a contractor for a job. Don’t assume other businesses have worked it out correctly – it’s your working arrangement that determines if your workers are employees or contractors.

Tony’s view: This is a killer because it’s true. Many times I have been the bearer of bad tidings that businesses have tax liabilities because their workers are employees. This makes the business uncompetitive. Between a rock and a hard place. If you want your workers to be contractors, make sure the arrangements are such to support this view.

Myth 4: If the contract or agreement says so, the worker is a contractor.

ATO view: A contact or agreement makes no difference and will not make your worker a contractor for a job. If the working arrangement is employment, a contract or agreement stating the worker is a contractor won’t override this employment arrangement or change the obligations you need to meet.

Tony’s view: Make sure you have a contract, and make sure the contract reflects the actual arrangements. Contracts that say one thing but operate another (which is what I think the ATO are referring to) are not worth the paper they are written on.

Myth #5: If the worker submits an invoice, they are a contractor.

ATO view: Submitting an invoice for work done or being “paid on invoice” makes no difference and will not make your worker a contractor for a job. The working arrangement determines whether they are an employee or a contractor, not whether they submit an invoice.

Tony’s view: One of the best tests of a contractor is that they are paid to produce a result. This should, where possible, be reflected in the invoice they provide.

Typically the ATO takes a very one-sided view of these matters. While what they say is largely correct, it is critical that any contractor has an ABN, and where possible, written contracts should be in place and invoices issued. All of these factors do make a difference (despite what the ATO says) but it is the actual nature of the working relationship that will ultimately determine whether the worker is an employee or a contractor. These factors may help to correctly identify that arrangement.

Be prepared for the ATO to follow the stance of the State and Territory Offices of State Revenue and take a hard line on this issue. Whether or not the position will be supported by the courts is a different matter.

In my view, taking critical tax reform issues off the table and abandoning the Tax White Paper process is a lost opportunity to make the sort of structural tax changes essential to Australia’s long-term prosperity. What we need is a mature debate, but instead we see a flurry of headlines on isolated issues. This has substantially narrowed the discussion on tax reform.
Lots of people invested lots of time and effort to make detailed submissions to the Tax White Paper. Despite the hope, it seems that the political tax debate has returned to its natural base, simplistic slogans and name calling.
In an effort to purge my pent up frustration on this, I have penned this blog.
Earlier this year, the Opposition leader, Mr Shorten, took to the supermarkets to talk to the battlers about how an increase in GST would affect them. He asked a lady “What’s your favourite type of lettuce?”. This led to a flurry of comments on social media, including the tweet:
“Bill Shorten really proving the political truism this week: you don’t win friends with salad.”
For the record, the woman responded “iceberg”, and Bill Shorten said “I like all sorts of varieties of lettuce”.
With these comments, the Opposition set the battle lines; they would not be countenancing any increase in the GST rate. The Government held its line for a while but then moved to distance itself from any increase in the GST.
Mr Turnbull said:
“It’s not a question of politics here. At this stage I remain to be convinced that a tax mix switch of that kind would actually give us the economic benefit that you’d want in order to do such a big thing.”
This reflects a subtle change, rather than the “turnaround” that the media are suggesting. It is a subtle change because the government had indicated that all potential changes to tax that may help the economy were on the table. In concentrating only on a rate increase for the GST without considering broadening the base, Mr Turnbull is largely correct in saying that economic benefit would be limited.
By doing this, the Government now avoids having to consider any changes to the GST and it now seems that any moves for real tax reform in this Budget are gone.
Why should a change to the GST be considered?
In its submission to the recent White Paper discussions the Tax Institute said:
“The Government should adopt a policy of shifting away from being dependent on income tax for the bulk of revenue collections towards more simple and efficient consumption taxes.
In light of this, the Government should undertake a comprehensive review of the current exemptions and special rules in the current GST law to determine their ongoing necessity/appropriateness and to ensure that the simplicity and efficiency that is sacrificed by the presence of these exceptions is still justified.”
By comparison, Australia has one of the lowest rates of GST among OECD countries and a smaller than average base (due to the number of exemptions) than other OECD countries with a GST or VAT.
Consumption taxes are generally regarded as efficient taxes due to their broad base. However, introducing exemptions brings complexity and detracts from the efficiency and simplicity offered by a broad-based consumption tax. For this reason, changes to rate and scope of the GST should at least be considered.
How could the GST change?
1. Increase the rate
2. Broaden the base.
There are currently 18 sub-divisions within the GST-free category but those most likely for review would be:
a. Food
b. Health
c. Education
d. Child care
e. Supply of a Going Concern
f. Farmland
3. Combination of both
Simply increasing the rate is a blunt tool, and unlikely to be classified as “tax reform”. It seems our political masters have reached the same conclusion, if for more basic reasons.
While any changes are worthy of consideration, it seems to me that a comprehensive review would be most beneficial, if also most politically dangerous (witness current events). Provided compensation is afforded to those that need it, a more efficient and resilient tax system should be the outcome. How that compensation is determined and delivered is the test of any government.

Political Reality
“Always back the horse named self-interest, son. It’ll be the only one trying.”
Jack Lang – Labor premier