Transcript No. 99/86

TRANSCRIPT OF

The Hon Peter Costello MP

TREASURER

Radio Interview with Neil Mitchell

3AW

Monday, 15 November 1999

8.35 am

E&OE

SUBJECT: Business Tax, Olympic Tickets, Victorian Election, Republic

Mr Costello, good morning.

Good morning Neil.

Why pursue the small subby when we read about millionaires managing to pay no tax?

Well of course we’re dealing with those people as well. In fact some of the

measures,which I announced last week, were directed precisely at people who are moving

income in and out of Australia with cuts in capitalisation rules and the like. So, a

number of measures directed precisely at those people and stronger anti-avoidance. But

there are also some measures which were recommended by the Ralph Review in relation to

personal services. If I could just explain what the measure is. It’s a measure which

says, that if you are really rendering personal services like an employee and you put in

between the person that’s rendering the personal services and the employer, if you

like, an interposed entity like a company or trust, that if it’s not a real business

you can still be taxed on a PAYE basis.

That’s fair enough. We’re not talking about people who are rorting the

system. But there are a lot out there who are in that situation who won’t sort of

suit this arbitrary 80 per cent figure, now you say you’ve got to make, if

you’re making more than 80 per cent of your income from one source you’re in

trouble, your tax goes up.

Well there are two tests. One is if you derive 80 per cent from one person and you are

not a business you will be taxed on a PAYE. Now, even if you derive 80 per cent from one

person, if you are still running a business, that is you really are in business . . .

How do you determine that?

Well, do you advertise your services? Are you available to work for other people as

well? Do you take the risk on your work? If you can show that you are actually running a

business then you’ll continue to be treated like a contractor, but it’s directed

at people who don’t advertise, who don’t hold themselves out for other people,

who don’t bring any materials, who really just work for one person and that’s

because in reality they are or they have been employees.

So who will determine whether you’re a business or not, the Tax Office?

Well, you will actually disclose this to the Tax Office and if you reckon you’re a

business and you disclose that to the Tax Office and it’s accepted, you stay under

the current rules.

But I’ll have to argue to the Tax Office that I am a business, I want to

(inaudible).

Well, when you say, have to argue to the Tax Office, you will have to actually be a

business. I mean, it’s like anything you do with the Tax Office, if you want to put

in expenses you might, say, have to argue with the Tax Office that they’re legitimate

expenses, but the Tax Office has various rules on these.

Okay. Now you’re a barrister, right?

I was.

You were a barrister?

Yes.

Now as a barrister you would be under this system and you would be making, you know,

you might represent somebody for a day or a month or a week and over a year you’re

probably going to represent dozens of people, so you’re within the 80 per cent rule.

What happens when the barrister’s heaven comes along and they say, we want you to

appear at this inquiry for us and it’s going to take two years? Full time, two years,

millions of dollars, do you suddenly start paying a different level of tax?

No they wouldn’t because, you see, they’re engaged in a business. Why are

they engaged in a business . . .

But they don’t advertise.

Well, they put their name in the phone book.

They’re not available, they put their name in the phone book . . .

Yes.

. . . is that advertising?

Yes it is. Yes it is. They . . .

They’re not available to anybody else, they’re tied up for two years . . .

Yes, but they . . .

. . . on one case.

No, no, no, but they are available to other people.

They’re not, they’re doing one case per year.

The whole thing is that one client has taken their services for a while but

they’re available to the whole world. What . . .

But not for two years, they’re not, because they’re tied up on one case.

But their business makes them available to the whole world. They wouldn’t be

caught, it’s been designed for that purpose. Look, what this is directed at is the

person who is sitting at a desk on a Friday afternoon working for an employer who comes in

on the Monday and says, I now work for my own personal company and you, the employer,

retain my own personal company. Now, they don’t hold themselves open to the world.

They’re sitting at the same desk, doing the same job and they’re only available

for the one person because in reality they’re employees, they’re not

contractors.

I understand that, but I think you might find you’ll catch a lot of others as

well.

Well . . .

How are you going to prevent that?

Well, we won’t be catching legitimate contractors in the building industry

because, and I’ve seen some of those examples, legitimate contractors in the building

industry who contract to do a job, they don’t contract to work for somebody but

contract to do a job, like lay 1,000 bricks, a carpenter who put up a frame, they

won’t be catching those sorts of people.

So even if they contracted to a job that might take a year, it won’t . . .

If they are a legitimate contractor, if I am a carpenter and I contract to put up

frames, right, I contract for a job and I bear the risk and I run the business, then

I’m not caught. It’s where I actually have entered the employ of somebody and

just interposed a company or a trust in between, that’s what we’re trying . . .

But I could say I’m contracting to do that job.

If you are a bonafide . . .

I’m employed, I’m a bank teller and I’ll contract to do the bank telling

job.

Well yes, I don’t think a bank teller is a legitimate contractor . . .

I agree, but I’m saying, under your definition, they could get around it.

No, let’s take the bank teller, right, because there have been examples. There

were examples of tram drivers, by the way, who say, I’m working for my own private

company that is now retained by the tramways board, it’s my company that’s

retained to drive the tram. Now, these people don’t hold themselves to the world as

tram drivers. There is only one employer, they have been employees. Let’s take the

example of the bank teller. The bank teller who turns up at the particular branch

everyday, he’s not a contractor . .

Why . . .

. . . we all know, but Neil, we know he’s not a contractor . . .

No, sure. We know that.

We know that.

We know that. But your definition seems to be confusing it. If it’s a matter of

contracts and advertising yourself and everything, why the 80 per cent rule at all?

Well, that’s just the indicator . . .

But, hang on, but is it an indicator or something that you’re firmly stuck with if

you . . .

No.

. . .don’t make the 80 per cent, you’ve got to pay the PAYE . . .

It’s dual. It’s 80 per cent for one person, right, then you look to see

whether they’re in business. If they’re doing 80 per cent for one person and

they’re not in business then they’re caught by these measures. If they’re

doing 80 per cent for one person and you look and you find they are in business, they just

happen to have one big contract, then they’re not caught.

Is this simplifying the tax system, you want to simplify?

It’s not part of a simplification measure. It was . . .

Complication?

Well no. It’s an avoidance type measure. It was recommended by the Ralph Review

and the Australian Democrats have required it, as you know. The trick is going to be

implementing this and that’s my responsibility, but I think the principle is right.

What about the owner-driver? I mean that’s a classic case, isn’t it? You own

your own truck and you’re, therefore you’re operating as a company, but you find

your main contract is delivering cigarettes or bread or something, it might be your only

contract. Are they legit?

Yes, well they’re in a business because they own their rig. I mean, the

owner-driver is a classic person in a business, isn’t he, he owns his rig.

I’d hope so.

Yes, his biggest expense is his rig which is worth hundreds of thousands of dollars.

He’s not the bloke that’s just dropped a company in to try and get out of wages.

But the person, let’s say, whose been employed by a transport company and never owned

their own rig and has been an employee and all of a sudden drops a company in and never

buys the rig, never pays the petrol, you know, all of which goes back to the company,

that’s the kind of . . .

Isn’t it right that the Tax Office has just had a four year audit on exactly these

sort of people?

Well, I think the Tax Office does audits all the time . . .

It didn’t find anything, it didn’t find significant rorting, so why go to all

this trouble?

Well, this has been on the agenda for a long period of time. There’s an

anti-avoidance rule that applies to it. It’s got to be done one by one. How did it

come up? Well, the Australian Democrats asked us to refer it to the Ralph Inquiry. The

Ralph Inquiry, not the Tax Office, the Ralph Inquiry, three leading Australian businessmen

looked at it, recommended it and I’ve accepted their recommendation.

You have the meeting, I know, with the small business people and the farmers,

specifically about this or at least part of that this?

No. It’s not about this. The small business, COSBOA raised another thing which is

called option 2, which I won’t go into now, it’s a quite complicated . . .

Well, I guess the point is, is there any chance of changing this or are you locked into

it.

No, the principle we’re proceeding with. What we’ve said is, we’re going

to negotiate all of the items that will be taken into account in assessing a business, but

the main ones will be whether you hold yourself open to the world, whether you advertise,

and whether you own your own rigs.

You wouldn’t take a couple of calls on this? A lot of people are calling through.

Sure. Just very quickly, yes. I want to discuss some other issues while we’re here

. . .

Of course . . .

. . . if we can, too.

Of course, of course. But I know this is really, certainly in my audience, is a hot

topic. Andrew go ahead please.

Yes, just inquiring. My wife does family daycare and is tied up with the council,

contracted to the local council. Where do those people stand?

Well it depends if she’s working solely for the local council and if she’s

subject to direction by the local council then she’s most probably an employee.

Okay, thanks Andrew. George, hello.

Hi. I’m a security guard, I’ve got a security firm. My company is contracted

to work for a large company. We have to exclusively work for that company, we’re not

allowed to go out and (inaudible) other work. Where do we stand on . . .

Well, if you are in a company which is able to hold itself out to the public, you are

taking risks. If you are undertaking the ownership of plant and equipment, like your own

cars or your own arms or something like that, you may well be in a legitimate business. If

you’re a legitimate business then this won’t be a problem for you. It’s a

problem for people who aren’t in legitimate businesses.

Yes, but my worry is the definition of legitimate and the definition of legitimate

being set by the Tax Office where we’ve got to go and argue for it.

Well, the definition will be set in the legislation. You know, the various points will

be put out as to what actually applies and the Tax Office will apply it. But it’s

always interpreted, you can always take on the Tax Office and those things, boards and so

on.

Yes, we can all take on the Tax Office. Hello Jack . . .

There should be more of it.

Really? Yes Jack?

G’day, how are you going?

Okay.

Look, I’m in the telecommunications, I install telephones with Telstra. Now I only

work directly to them but I provide my own van and my own tools and that sort of stuff,

and I’m running my own business.

And would you be, would you actually take other jobs if other people referred them to

you?

Oh yes, I would. Yes, for sure. I get enough work doing what I’m doing now, but I

suppose I advertise through word of mouth.

Yes.

Is that enough, word of mouth . . .

Well . . .

. . . or do you have to have your name in the phone book (inaudible). . .

Well, that’s one of the things he does. But I think he said he owned his own rig,

didn’t he? And I think he said he carried his own equipment, and if he’s

prepared to work for other people, it looks to me as if he’s engaging a business. I

mean, there are other things that are, you know, is a guy like that insuring himself?

Well anybody who’s a sub-contractor is paying work cover, they’re paying

insurance . . .

Quite right.

. . .that’s regardless of how much work you get from an employer . . .

:

No, no. But you see the people . . .

. . . they’re paying their own holidays.

. . . the people that are interposing companies to minimise their tax, I think

you’ll find they’re not insuring themselves.

But they have to because that’s the whole point and the company’s doing it so

they reduce their on-costs.

But it’s a whole artificial mechanism, that they don’t actually insure

themselves because at the end of the day they’re not actually in business,

they’re actually working for an employer.

No, they’ve got to have their own work cover.

Well, some of the do . . .

They’ve got to cover their own holidays . . .

. . . some of them do.

. . . but a company’s not going to allow you to be a contractor and then pay all

your on-costs, is it?

Well, I think you’ll find that a lot of these people don’t do all of those

sorts of things. It’s one of the evidences that . . .

Well, who pays . . .

. . . not actually . . .

. . . who pays their work cover?

. . . they’re not actually contractors, that they are not taking out their own

personal liability insurance and insuring their work as well.

Will that also suit the test then? If you’re taking out your own insurance . . .

It’s a big part of it.

But every subby is.

Well every legitimate subby is, yes, and no legitimate subby will be caught.

That’s the whole point. But there, if I may say so, there are an awful lot of

so-called subbies who aren’t subbies at all and these are people who essentially have

just set up arrangements to try and walk out of the tax system. And I think your average

PAYE taxpayer wants to know how they can do it and why the Tax Office should let them. And

it’s tightening down on that definition.

I think your average PAYE taxpayer would like to know how Kerry Packer’s company

could make a $1.4 billion profit and pay no tax?

It’s a good point and . . .

Do you know the answer then?

Well, let me make this point. That Mr Packer has been in litigation with the Tax Office

now for about, I don’t know how many years, and I know it’s now at the full

court of the Federal Court. And I think the Tax Commissioner won some of those points and

I suspect it’s now waiting the High Court.

We’ll take a break, come back with more on other issues with the Treasurer.

It’s ten to nine, the federal Treasurer Peter Costello’s with me. Now something else,

Olympics tickets Mr Costello, has a deal been broken with SOCOG over GST on the Olympic

tickets?

No.

But it was done by the Prime Minister, the agreement made?

What happened was this, that SOCOG said they were locked into prices and they couldn’t

increase their prices because it would breach, you know, the IOC regulations and that

they’d been pre, you know, pre-committed to particular prices. They said they can’t lift

their prices to take into account the GST. So the Government said, all right, well the

Government will make a grant to cover the difference. Then we find that these prices

weren’t fixed at all. They were actually selling a lot of these tickets above market for a

premium to their rich list. So they could move the price at will in relation to those

premium tickets. And if they can move the price at will in relation to the premium tickets

above face value, they can move them to take into account the GST. Now, the Government is

not going to sit back and say, here is SOCOG increasing the face value of tickets to its

rich list and the Government’s going to walk in and pay the GST for the rich. The

Government is not going to do that. If they’re increasing the price, they can

increase them to cover the GST and the people that are on the rich list can pay the GST

and the ordinary taxpayer is not going to subsidise it.

They were trying to con you a bit there, were they?

Well I think they were conning the whole of Australia weren’t they? We didn’t

know, we the Government didn’t know, that aside from what was being advertised at

face value to the Australian people, there seemed to be this second lot of tickets, which

had a variable value according to how much you were prepared to pay. We didn’t know

that. When we were asked to make a grant to cover the GST, we thought we were covering the

GST on a face value, which was going out to the Australian public. We find out that they

were selling above face value to rich people, who as far as the Government is concerned

can pay the GST and this is what the GST is all about. To make people pay their

liabilities.

They want urgent talks, but you could say they have to sort it out, they can’t

carry it. Any chance of changing your mind?

No, not in relation to the premium tickets, none whatsoever. The Australian public

shouldn’t be making up the GST on the rich list.

Can I ask you about a few other things? What sort of money pressure have we got ahead?

These refugees are getting very expensive aren’t they, the boat people, refugees,

some of them, some of them not? The people smuggling, that’s extremely costly. East

Timor obviously as we know is extremely costly, what’s all this going to do to our

budgeting?

Well, the Budget’s under a lot of pressure at the moment. The big items are of

course East Timor. This is a major military commitment for Australia and it requires us to

raise some additional ready battalions so that we can rotate troops through East Timor.

That will have quite a significant cost on the Budget and it will be important for us to

fund that to make sure that our troops are adequately supported and they’re given

adequate leave and adequate aid.

What about the people smuggling? The Minister estimates $60,000 a head, so last year

there’s 42 million last week, $42 million a week.

Well, there’s a couple of elements to that. Firstly there’s the increased

surveillance. Secondly, the holding of people that are actually brought back to Australia.

Thirdly if I may say so, they all seem to take legal appeals once they get here and I know

the Minister is trying to restrict that. You realise . . .

Can you stop it?

. . . well if you get the required legislation through the Parliament which he’s

having difficulty doing. You realise that a lot of the people once they get into

Australia, then start suing the government to stay and the Minister is trying to restrict

some of those appeals. And then of course aside from that, the other pressure on the

Budget is the legitimate refugees. We airlifted something like 2,500 East Timorese into

Australia and Kosovars – many of whom are still here.

Okay, how do you pay for it all?

Well, we started off the year with a surplus Budget and some of that money will go

towards it, we’ll have to be tight on expenditures and we’ll have to, in

relation to East Timor, look at defence spending.

Quick one, negative gearing, the Democrats want it changed. Are you committed to

allowing negative gearing?

On property?

On property.

On property, yes. Where somebody actually borrows to buy a property, the borrowing is a

cost of buying the property or running it as a rental. And we’ve said that’s a

legitimate cost. If you’re actually borrowing, you know, if you’re actually

bearing the risk. And remember this that Keating tried to abolish negative gearing back in

the mid-eighties and all it did was it dried up rentals.

But the Democrats say they want it. Given what happened on the GST, are you confident

you won’t have to bow to that?

Well I’m arguing very strongly against it now, I can assure you of that.

Look is it negotiable or not?

Well at the end of the day, let’s make this point. If you get business tax through

the Senate, it’s either got to be supported by the Labor Party or the Democrats. The

Labor Party say, oh, they are in favour of business tax, they just can’t give us an

opinion on whether they will vote for it. They can’t give an opinion on anything at

the moment. We need more information, more information, more detail, more detail. What

they need is leadership. They don’t need more information.

We’ve got the Opposition Leader in a moment.

Well ask him. Why doesn’t he support business tax? Now, the real reason is he

can’t make a decision. If he were to say he would support the great reform of

Australian business taxation, that would go through the Senate. If he doesn’t then

the Australian Democrats come into play and they will try and insist on all sorts of

additional requirements, one of which is the abolition of negative gearing on property, we

now see.

So is that negotiable at all?

Well I am opposed to it.

Yes, but you supported the GST too, until the Democrats got to it.

And we implemented it.

You fiddled it.

Well, we lost its application in one area as a requirement of the Democrats. It’s

a matter I regret but we were faced with the situation that we either lost the whole

reform, again because Labor dealt itself out of the equation, we lost the whole thing or

we were forced to compromise.

The speech of yours at the weekend on the state election result at State Council I

think it was, have you spoken to Jeff Kennett since he lost?

Not since the election. Obviously I was in touch with him before the election and since

then I haven’t been in touch with him.

Are there lessons there for the Federal Government in what’s happened?

Oh look, I made the point at the weekend that the third term defeated the Kennett

Government and the Federal Government’s coming up for its third term. Third terms are

hard to win and we have to make sure that we fix our administration, we fix our campaign

techniques, we get the Liberal Party back on a strong footing. It’s going to be a

hard Federal election to win.

Do you think there was an element of punishment for arrogance in the Kennett result?

I said yesterday, I think the voters wanted a change of style. And they got it.

What was wrong with the Kennett style?

I think that they probably, look, there were a whole lot of factors and, you know, I

won’t go through them all, but I think one of the things that was very damaging was

the gagging of the Ministers and the Members. And that’s come up through the Party

quite a bit and I think they wanted a bit more openness. I think the public wanted a bit

more openness.

Did you say yesterday that Steve Bracks worked for Paul Keating?

I said, I made the point that he’d been an adviser in the Keating Government at

the time that they took away the L-A-W tax cuts.

Is that true?

Yes it is. He wasn’t on Mr Keating’s personal staff but he was working for

one of the Labor members at the time the L-A-W tax cuts were abolished.

Will you need to renegotiate the GST deal with this Government?

The Federal funding to the States? No, it’s a signed up agreement. Can I make this

point Neil, it’s an important point. All of the revenue from GST goes to State

Governments. No dollar of it comes to Canberra. The great beneficiaries of the revenue

from GST are Premiers Beattie, Carr, Bracks, Bacon – all the Labor Premiers. This is

going to be a revenue source for Mr Bracks for quite some time. And the Labor Premiers

signed up, I mean, I’ve never seen such a stampede when I put the document out on the

table, a stampede of Labor Premiers to sign it up.

One last question. When you see the Prime Minister there in the papers bowing to the

Queen, shaking hands with the Queen, do you wince a bit?

Well, look my views are well known and we had a Referendum and the Referendum confirmed

the Queen as our Head of State. Now because she’s our Head of State we have to treat

her with due respect and the Prime Minister does.

(inaudible)

If you thought it was time to change, that was a vote for last Saturday, we had the

vote, she’s our Head of State and we must treat her with great respect.

Peter Costello.