House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Alienation of personal services income

Schedule 1 to this Bill amends the ITAA 1997 to introduce new rules for the income tax treatment of certain personal services income. Personal services income is generally paid to an individual who provides the services or to a company, partnership or trust (interposed entity) through which the services are provided by an individual.

The measure will not:

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apply where an individual or interposed entity is conducting a personal services business; and

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affect the legal status of an interposed entity or deem an individual to be an employee for the purposes of any Australian law or instrument.

The rules are designed to improve the integrity of the tax system by addressing both the capacity of individuals and interposed entities providing the personal services of an individual to claim higher deductions than employees providing the same or similar services and the alienation of personal services income through an interposed entity.

These improvements will be achieved by:

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limiting and clarifying the deductions available against personal services income at both the individual and interposed entity level; and

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ensuring that, after allowing deductions to the interposed entity, any income remaining is attributed to the individual. Schedule 1 to the TAA 1953 is being amended to provide a collection mechanism for tax payable on any income so attributed.

Date of effect: The personal services income measure will apply to assessments for the 2000-2001 income year and later income years. The accompanying collection arrangements will apply to payments received by interposed entities from 1 July 2000. The measure contains a transitional arrangement for the 2000-2001 and 2001-2002 income years whereby the measure will not apply to certain payees under the prescribed payments system for those 2 income years.

Proposal announced: The proposal was announced in Treasurer's Press Release No. 74 of 11 November 1999.

Financial impact: The financial impact of the new rules is set out in the following table

Compliance cost impact: A separate regulation impact statement is available for the measure in this Bill.

Summary of Regulation Impact Statement

Regulation impact on business

Impact: The measure contained in this Bill is part of the Government's broad ranging reforms that will give Australia a New Business Tax System. These reforms are based on the Recommendations of the Review that the Government established to consider reforms to Australia's business tax system.

The measure may cause an increase in compliance costs for some taxpayers, however these increases will be offset by broader economic benefits from increasing the integrity of the tax system.

Main Points:

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Potential compliance, administrative and economic impacts of the measure contained in this Bill has been carefully considered by the Review and the business sector. Substantial consultation with the business sector was an important part of the Review.

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The measure could impose additional withholding obligations on an interposed entity. Clarifying the deductions which are available to be offset against certain personal services income will have only a minor impact on taxpayers at the time of preparing their returns.

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The measure will contribute significantly to the fairness, integrity and equity of the tax system by reducing the opportunities to avoid tax which arise from complexities and certain anomalies in the current taxation legislation.