Publication date: 22 Aug 01 |
Source: THE TAX INSTITUTE
Couriers should be cautious about breathing a sigh of relief. They now join approximately 1.1 million* other independent contractors who are also expected to fall outside the new Alienation rules, but who now need to navigate all the 'old' tax law surrounding income splitting.
Despite calls by the Taxation Institute over recent months for clarification, the ATO has made no attempt to clearly outline the real position for the majority of contractors that is, for those not affected by the new PSI rules. Many contractors are under the mistaken impression that the new Alienation rules are all they need to worry about and that they will be able to split income with family companies and spouses and claim extra home office and travel expenses provided they can 'get around' the new laws.
Nothing could be further from the truth. The fact is that, for many contractors, income splitting will still fall foul of the anti-avoidance provisions of Part IVA. The ATO has won a number of Court and tribunal cases concerning contractors and the anti-avoidance rules so we know that the old law is effective. Part IVA carries very significant penalties, as well as denial of deductions. The intense community focus on the new PSI rules has indirectly contributed to this misunderstanding of Part IVA's continuing importance to contractors.
The ATO has in the past issued rulings about how particular businesses should operate to ensure the Part IVA will not be applied by the ATO for example, there is a ruling for incorporated medical practices. The Taxation Institute is calling for an ATO ruling to be released outlining whether, and how, other contractor businesses can operate without fear of Part IVA being retrospectively applied, with all the penalties that entails.
Such a ruling should clearly advise:
Which contractors need to be concerned about Part IVA.
Whether profits can be split by a contractor.
Whether profits can be retained in a contractor company (this is a form of income splitting, according to case law).
If income splitting is permitted in some circumstances, what are they?
What home office expense deductions can a contractor operating from home claim?
What travel expenses can be claimed by contractors travelling from a home office to a client, and between clients (especially in the light of Payne's case).
What expenses can be claimed for family members who assist in the contractor business.
What superannuation payments are deductible?
Because of the confusion-surrounding contractor's rules (both those covered by the new PSI rules and those 'only' covered by the old rules), the Institute urges all contractors to be extremely careful in preparing their 2001 tax returns.
Since the new PSI rules were based on the broad principles of the 'old' law, and all that 'old' law is still in place and effective, the Taxation Institute again queries why the PSI legislation was necessary in the first place.
'The PSI legislation was the law we didn't need to have,' said Ms McCleary.
'As many contractors are about to find out, the PSI provisions are merely a small diversion away from the main game. The real issues arise under IVA, and always have done. Taxpayers deserve to have these issues explained to them in simple, business-orientated terms, so they can comply with their tax obligations. And this needs to be done quickly so that 2001 year tax returns can be lodged correctly.'
*Official estimates indicate there are 1.4 million contractors in Australia. We understand that the ATO considers about 300,000 contractors will be affected by the PSI legislation. This leaves approximately 1.1 million contractors potentially in the limbo land of Part IVA.