Experiences of the Australian version of IR35

As the UK's Office of Tax Simplification continues its review of IR35 and considers what changes will be made in the future, Australia has had some experience of its own regulations and legislation relating to contractors.

Michael Kelson, Chairman of Freelance Global Ltd, writes an open letter to UKTECH readers to explain the position in Australia.

Mr Kelson writes:

1. Explanation

As your Government commences its review of IR35, we would like to make a suggestion, knowing full well that some of your numerous experts may well be on top of the issue, already.

2. By way of introduction

Freelance Global Ltd (Australia) is one of the largest contractor management groups in Australia and is in fact the 'grandfather' of the industry in Australia.

Freelance is unique in so far as we are the only group who assess and facilitate bonafide independent contractors within the dual spheres of common law and taxation law.

3. By way of background

In Australia, truly independent contractors are influenced and governed within four spheres, namely

• Common law;
  
• Taxation law;
  
• the Independent Contractors Act (a first in the world);
  
• the Sham Contract provisions of Fair Work Act.

Our reading to date would indicate that your review is very much focused on taxation issues so we will not dwell on our Common Law and Industrial Law aspects but they do constitute a very important element of the independent contractor scene in Australia, especially for us as we predominantly deal directly with companies for whom in many instances compliance with industrial law is even more important (as a practical issue) than compliance with taxation law.

4. Common law

In Australia the courts use a listing of 21 characteristics, which in their view defines the profile of an independent contractor.

They are very insistent on the fact that no single characteristic is predominant. It is the totality of the arrangement.

The characteristics are:

• 1. The degree to which the worker is subject to the control and direction of the Company in performing the services;
  
• 2. The ability of the worker to delegate the performance of tasks to others;
  
• 3. The way in which the worker is paid;
  
• 4. Whether the worker provides and maintains his/her own tools and equipment;
  
• 5. Whether the worker is contracting under a business name or company;
  
• 6. Whether the worker is engaged to produce a specified result;
  
• 7. The ability of the worker to refuse work;
  
• 8. Whether the worker advertises his/her services to the public at large;
  
• 9. Whether the worker is able to perform work for others;
  
• 10. Whether the worker is required to wear a company uniform;
  
• 11. The ability of the worker to set his/her own hours of work and work location;
  
• 12. Whether income tax is deducted from any payments made to the worker;
  
• 13. Whether the worker is entitled to any paid annual leave or sick leave or paid public holidays;
  
• 14. Whether superannuation contributions are made on behalf of the worker;
  
• 15. Whether the worker is required to make his/her own insurance arrangements;
  
• 16. Whether the worker makes a profit or loss on the task;
  
• 17. Whether the worker can decide how to perform the work so long as the job gets done;
  
• 18. Whether the worker is responsible for rectification of defects at his/her own expense;
  
• 19. Whether the worker is responsible for his/her own expenses;
  
• 20. Whether the payer can only terminate the contract with the worker without penalty where the worker has
  not fulfilled the conditions of the contract: and
  
• 21. Whether the worker is an accessory or part of the business.

These characteristics are all important in terms of the relevance of the Independent Contractors Act and Fair Work Act. I suspect your courts apply a similar if not identical list of characteristics.

5. Independent Contractors Act 2006

Predominantly the objectives of the Act of Parliament are two fold, namely:

• to enshrine the right of all Australians to work as independent contractors and for others to engage them as independent contractors; and
  
• to provide guidance on what constitutes a fair contract and what remedies exist for persons believing their contractual arrangement has breached these provisions.

The Act can be viewed at: Independent Contractors Act 2006.

6. Fair Work Act

This is the Act of Parliament introduced by the Australian Labor Party to replace Work Choices. The sham contract provisions were transferred directly from the Workplace Relations Act 2006.

The provisions are, under Division 6 - Sham Arrangements:

s357 Misrepresenting employment as independent contracting arrangement

(1) A person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor.

(2) Subsection (1) does not apply if the employer proves that, when the representation was made, the employer:

(a) did not know; and

(b) was not reckless as to whether;

the contract was a contract of employment rather than a contract for services.

s358 Dismissing to engage as independent contractor

An employer must not dismiss, or threaten to dismiss, an individual who:

(a) is an employee of the employer; and

(b) performs particular work for the employer;

in order to engage the individual as an independent contractor to perform the same, or substantially the same, work under a contract for services.

s359 Misrepresentation to engage as independent contractor

A person (the employer) that employs, or has at any time employed, an individual to perform particular work must not make a statement that the employer knows is false in order to persuade or influence the individual to enter into a contract for services under which the individual will perform, as an independent contractor, the same, or substantially the same, work for the employer.

It is interesting to note that unions can prosecute a case under these provisions.

The Act can be viewed at: Fair Work Act 2009

7. Australian taxation law

The status of a person or entity as that of an independent contractor has never been in doubt when the 'service' being provided and charged for is predominantly for equipment or materials or both.

In Australia, the Australian Taxation Office views predominantly as in excess of 50 per cent.

The vexed question in Australia (as it obviously is in the UK) is establishing the status (in an objective manner) of a person or entity providing and charging for a 'service' predominantly consisting of their/its personal exertion.

In 2001, the Australian Government introduced the Personal Services Income (PSI) provisions as part of the

Australian Income Tax Assessment Act.

PSI commences with a very simple premise, namely, that if your 'service' is predominantly that of personal exertion you automatically become subject to the provision of PSI.

The two significant provisions are:

• all income derived by the individual, whether it be directly or through an entity must be declared (100 per cent) by the individual providing the personal exertion; and
  
• the so-called 'business deductions' with the exception of necessary insurances eg professional indemnity, personal accident and illness, and personal superannuation are all disallowed.

Having said this, the legislation then defines two 'carve-outs' or exemptions. If either of these exemptions can be achieved, the individual in question is deemed to be exempt from PSI and in effect is regarded as deriving business income and eligible to claim business deductions.

The two exemptions, in no particular priority are:

• the 80/20 rule - you qualify as a personal services business if less than 80 per cent of your personal services income in an income year comes from each client and you meet one of the other three personal services business tests (the unrelated clients test, employment test or business premises test)

  Or

• the results test:
  - is the income paid to the individual to achieve a specific result or outcome?
  - does the individual have to provide necessary tools or equipment (if any) to do the work, and
  - is the individual liable to rectify defects in the work at their own cost.

Shortly after the introduction of PSI, Freelance developed an assessment tool, comprising 27 questions designed to establish from both a common law and a taxation perspective whether an individual (on balance) had the characteristics of an independent contractor or would be deemed to be subject to PSI.

The legislation can be viewed at: Income Tax Assessment Act 1997 - Sect 84.5

The above represents a brief summary of the Australian position with emphasis on the common law and taxation law.

In the event you and your colleagues are not intimately aware of the above detail, please do not hesitate to ask the writer for further, more detailed explanations and/or submit some specific questions.

We trust the above has been both interesting and helpful.

Good luck as you enter into discussions with the Government.

Yours sincerely

Michael Kelson

Chairman

Freelance Global Ltd.

14 December 2010

The letter was sent to UKTECH readers from Michael Kelson, chairman of Freelance Global. Freelance is a global professional workforce management services organisation that specialises in human capital and contract management.

Editor's note: I am grateful to Mr Kelson for sharing his view on this. If UKTECH readers have any specific points they wish to raise, please post below and I will ensure they are brought to Mr Kelson's attention, as he has kindly offered further information if required.

Susie Hughes