The Governemt introduced into Parliament today a Bill to prevent individuals

reducing their tax by diverting income generated by their personal

services to a company, partnership or trust and to limit work related

deductions available in those cases.

This is an important measure to enhance the integrity of the taxation

system which I foreshadowed in the Governement’s response to

the Ralph Report recommendations which I announced on 11 November

1999

These measures ensure that the tax system is operating fairly for

all taxpayers and protect the revenue base.They are in accordance

with the Ralph review recommendations and in line with our commitments

on revenue neutrality.

To counter alienation of personal services income, earnings from work

will be treated the same way for all taxpayers, regardless of whether

the income is earned through a company or other entity, or earned

directly by the individual.

The measures will not affect genuine independent contractors.

Entities that earn 80 per cent of their income from one source will

require a determination from the Commissioner that they are a personal

services business. The Bill sets out the tests that will allow the

Commissioner to determine whether an entity is running a business.

The Bill makes it clear that the measures will not deem an individual

to be an employee for the purposes of other legislation or industrial

award. The legal status of the entity is not affected in any way.

The legislation limits the deductions that individuals or entities

that are not running a personal services business can make, but it

also makes clear that individuals or entities that are entitled to

claim business related deductions under current tax arrangements,

will still be entitled to claim these deductions. For example, deductions

for workers’ compensation and the costs of obtaining work will

continue to be allowed.

The measures will apply from 1 July 2000. The Government recognises

that this is a time when business will be settling in to the new tax

system and has introduced transitional arrangements to minimise the

compliance burden on taxpayers. The Commissioner will be able to make

a declaration so that the measure will not apply to contractors under

the Prescribed Payments System who have payee declarations with the

Commissioner as of today. The Commissioner’s declaration can

apply until 1 July 2002.

CANBERRA

13 April 2000

CONTACT : Nigel Bailey (02) 6263 3766