House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Regulation Impact Statement

Policy objective

The objectives of the New Business Tax System

2.1 The measures in this Bill are part of the Government's broad ranging reforms which will give Australia a New Business Tax System. The reforms are based on the Recommendations of the Review, instituted by the Government to consider reform of Australia's business tax system.

2.2 The Government instituted the Review to consult on its plan to comprehensively reform the business income tax system (as outlined in ANTS). The Review made 280 recommendations to the Government, designed to achieve a more simple, stable and durable business tax system.

2.3 The New Business Tax System is designed to provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings, as well as providing a sustainable revenue base so the Government can continue to deliver services to the community.

2.4 The New Business Tax System also seeks to provide a basis for more robust investment decisions. This is achieved by:

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improving simplicity and transparency;

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reducing the cost of compliance; and

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providing fairer, more equitable outcomes.

2.5 This Bill is part of the legislative program implementing the New Business Tax System. Other Bills have been introduced and passed as listed in table 2.1.

Table 2.1: Earlier business tax legislation

The objectives of measures in this Bill

Alienation of personal services income

2.6 The alienation of personal services income measure addresses the use of interposed entities to receive personal services income by ensuring that such income is attributed to the individual(s) who provided those services.

2.7 It will also clarify the deductions which are available to be offset against certain personal services income in situations where those services are received by an individual or an entity (company, trust or partnership).

2.8 The alienation of personal services income poses a growing threat to the income tax base and raises issues of equity between those that can take advantage of these arrangements and other providers of personal services, including wage and salary earners, who cannot.

2.9 Under the current law, the Commissioner can only challenge these arrangements successfully by applying the general anti-avoidance provisions in the taxation law on a case-by-case basis. This is resource intensive and inefficient.

Implementation options

2.10 The measure in this Bill arise from recommendations of the Review. Those Recommendations were the subject of extensive consultation. The implementation options for these measures can be found in A Tax System Redesigned , recommendations 7.2, 7.3 and 7.4 (pp. 286-294).

Assessment of impacts

2.11 The potential compliance, administrative and economic impacts of the measure in this Bill have been carefully considered, both by the Review and by the business sector. The Review focussed on the economy as a whole in assessing the impacts of its recommendations and concluded that there would be net gains to business, government and the community from business tax reform.

Impact group identification

2.12 Groups affected by the measure in this Bill are:

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entities interposed between a provider of personal services and the recipient of the services; and

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taxpayers other than employees who provide personal services income.

Analysis of costs/benefits

Compliance costs

2.13 As is standard with new measures, groups affected by them will need to incur a small up-front cost in either familiarising themselves with the new law or having advisers familiarise themselves with the new law and, if necessary, communicating the necessary information to taxpayers affected.

2.14 However, overall, the measure in this Bill is expected to reduce compliance costs for business as it will provide a more consistent and easily understood business tax system.

2.15 The measure in this Bill may increase compliance costs for some taxpayers. However, these costs are considered to be outweighed by the improvement in the equity, fairness and integrity that the measures will introduce to the tax system. The compliance cost impact of this measure is discussed in paragraphs 2.16 to 2.21.

2.16 The measure may have compliance implications for taxpayers whose personal services income is currently paid to an interposed entity. However, the measure will not apply where services are provided in the manner of a personal services business. The measure contains 3 tests (clients, employment, business premises) to determine whether a personal services business is being conducted. Also, taxpayers will be able to request a determination from the Commissioner to the effect that they are conducting a personal services business.

2.17 The compliance impact of this measure will arise primarily from taxpayers and taxation professionals having to familiarise themselves with the new provisions.

2.18 Taxpayers who conduct a business of providing personal services through an entity may choose to seek a determination from the Commissioner that the measure does not apply if their personal services income from one source is at least 80% of their total personal services income.

2.19 There is also a transitional rule to allow the Commissioner to declare that the new regime will not apply to an entity in the Prescribed Payments System on 13 April 2000. This will reduce the compliance costs of those taxpayers affected.

2.20 The measure could also impose additional collection obligations on the interposed entity where the interposed entity does not promptly pay the amounts received for the personal services to the service provider as salary or wages. The interposed entity will be required to pay amounts during the income year (under the PAYG withholding system) and issue a payment summary to the service provider.

2.21 There will not be any compliance cost impact on the recipients of the services because the new withholding obligations are only imposed on an interposed entity.

Administration costs

2.22 The measure will be administered by the ATO using existing resources.

Government revenue

2.23 The measure raises revenue in the year of introduction and in subsequent years. The estimated increases in revenue are set out in the General Outline and Financial Impactsection of this Explanatory Memorandum.

Economic benefits

2.24 The New Business Tax System will provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings. The economic benefits of these measures are explained in more detail in the publications of the Review, particularly A Platform for Consultation and A Tax System Redesigned .

Other issues consultation

2.25 The consultation process began with the release of ANTS in August 1998. The Government established the Review in that month. Since then, the Review has published 4 documents about business tax reform; in particular A Platform for Consultation and A Tax System Redesigned in which it canvassed options, discussed issues and sought public input.

2.26 Throughout that period, the Review held numerous public seminars and focus group meetings with key stakeholders in the tax system. It received and analysed 376 submissions from the public about reform options. Further details are contained in paragraphs 11 to 16 of the Overview of A Tax System Redesigned .

2.27 In analysing options, the Review was guided by, and frequently referred to, views expressed during the consultation process.

2.28 Consultation with professional associations and industry representatives was undertaken following the announcement of this measure.

Conclusion and recommended option

2.29 The recommended option should be adopted. The option will contribute significantly to the fairness, integrity and equity of the tax system by reducing the scope for minimisation and deferral of tax by taxpayers which arises from complexities and certain anomalies in the current taxation legislation.

2.30 The measure may increase compliance costs for business taxpayers but the overall changes to business taxation will provide business taxpayers with greater flexibility in managing their affairs and contribute to the integrity of the tax system.