Government urged to crack down further on sham contractors

The Board of Taxation has recommended that the Federal Government extend its crackdown on sham contracting arrangements, where workers who are employed, then set up companies and are paid as contractors to reduce their tax burden.

Assistant Treasurer Nick Sherry asked the board in May 2008 to investigate whether current laws introduced in 2000 preventing sham contracting arrangements were adequate, after tax experts reported a sharp increase in the use of such arrangements.

The arrangements are common in the IT, mining and engineering sectors.

“Over the last 10 or so years there’s been a real trend towards contractors setting up companies because they hear from their mates that it’s a quick way to reduce their tax bill,” Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants in Australia, says.

“But a lot of them don’t realise there is tax legislation that looks to cancel the effect of those arrangements. However, the laws are so complex that the taxpayers and even tax agents struggle to understand the laws.”

The Board has told the Government that more needs to be done.

“The Board has concluded that while the current rules have gone some way in achieving their intention of improving integrity and equity in the tax system, the extent of this improvement is inadequate,” Sherry said in a statement.

“The Board has found evidence of a low level of compliance and a degree of uncertainty or ‘greyness’ around the rules, such that it has found the alienation of personal services income rules in their current form do not provide acceptable levels of integrity and equity.”

Suggestions from the Board include a new reporting obligation for contractors, clarifying and simplifying the deduction provisions for contractors and implementing a test to determine whether contractors are working in an “employee-like manner”.

The recommendations have now been referred to the review of the tax system being carried out by Treasury Secretary Ken Henry.

“We’re happy with the suggestions and it follows recommendations we’ve been making,” El-Ansary says.