Australia waters down its IR35-style personal services tax

A recent Federal Parliament ruling over the Australian Alienation of Personal Services Income Bill will mean a significant backtracking on its original guidance. A draft re-write of the guidance has already resulted in a clearer set of guidelines as to whom it will affect.

The re-write follows recent rulings by the Australian Federal Parliament supporting amendments to the tax law as it affects contractors.

The Australian Taxation Office's controversial Bill would otherwise have treated contractors as employees of the companies they work for, however this has now been substantially eased by the re-written guidance.

The Federal Parliament's ruling, which will overwrite the Bill's existing guidance, makes clear that a contractor is not within the alienation measure and can self-assess their tax payments accordingly if they come within one of the following four situations (as compiled from the legal reports by Go Matilda):

They can satisfy the 'results test', i.e. that he or she:

(i) Works to produce a result(s); and

(ii) Provides the tools and equipment necessary (if any) to produce the result(s); and

(iii) Is liable for the cost of rectifying any defective work.

or

None of his or her clients pay him or her 80 per cent or more of his or her personal services income in the year of income and you have two or more unrelated clients (who were obtained as a result of you making offers to the public at large or to a section of the public).

or

None of his or her clients pays 80 per cent or more of his or her personal services income in the year of income, and

(i) He or she engages an individual(s) or an unrelated entity(ies) to perform 20 per cent or more (by market value) of the principal work (i.e. the work that generates the personal services income) or

(ii) He or she has an apprentice for at least half the year.

or

None of his or her clients pay 80 per cent or more of his or her personal services income in the year of income, and he or she exclusively uses business premises that are physically separate from his or her home, or from the premises of the person for whom he or she is working.

The reason these provisions are so critical is that if a contractor is caught by the alienation measures:

(i) The amount of the personal services income is included in the assessable income of the individual whose personal efforts or skills generate the income.

(ii) The individual or personal services entity will not be able to claim certain deductions. For example, rent expenses, mortgage interest payments, rates and land tax paid in respect of the individual's private residence will not be deductible to the extent that those expenses are incurred in gaining or producing the individual's personal services income.

(iii) Payments made to the individual's spouse (or any other associate) will not be deductible when the payment relates to non-principal work, such as bookkeeping for an individual who is a builder.

(iv) A personal services entity may also have additional withholding obligations in relation to personal services income that is attributed to an individual under the alienation measure.

In the Judicial Review of IR35 in the UK, Judge Burton described the guidance set out for IR35 as 'inappropriate, unclear, inflexible, inaccurate and unhelpful.' He too handed down binding guidance in the High Court making reference to the 'unnecessary, emotive and colourful language' in the Inland Revenue's original press notice, which he said: 'set the tone for a hostile debate.'

Whilst Judge Burton's guidance has been taken on board by the Revenue, the legislation itself remains the same as the Judge ruled that IR35 was 'not unlawful.'

The PCG have announced they will appeal the ruling and will be taking the Government back to Court later this year.

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Richard Powell, UKTECH