Paralysed in a tax office trap

Australian Tax Office restrictions are leaving contractors out in the cold, unable to gain the Australian Business Numbers needed to operate alone.

The Australian union movement has been quite open about its campaign to stamp out independent contractors wherever it can. Running parallel to this it’s instructive to see that the Australian Taxation Office has shifted to a decidedly anti-independent contractor stance over the last few years.  The outcome (intentional or not) is to aid the unions’ objectives.

Last week Robert Gottliebsen described the behaviour of one tax official as demonstrating a “blood lust in the tax office” toward small business people (Call off the small business attack dogs, April 19). This attitude goes deep because it’s entrenched in ATO’s administrative systems. Take this example.

Over about the last two years the ATO has started rejecting more applications by individuals to receive an Australian Business Number. The implications are significant because effectively, if you have no ABN you can’t be in business for yourself!

First, under new national business name registration rules if you don’t have an ABN you can’t register a business name. And it’s an offence to use a business name that isn’t registered.

Further, if you operate a business without an ABN anyone paying you is required to withhold 46.5 per cent of your payment and send this to the ATO. No-one can operate a small business under this cash denying arrangement. 

In addition, without an ABN you’ll find it impossible to register under state workers compensation schemes and to receive other regulatory registrations and approvals. Also, submitting tenders for government or private sector work become impossible without an ABN.

By controlling to whom the ATO allocates ABNs, the government has massive big brother/sister type, master control of the make-up and structure of the Australian workforce and business. The works against the original intent of the ABN system, which was to give the ATO significant auditing capacity to detect non-declaration of incomes.

When the Australian Business Number system was established around 2000, the process intentionally gave an ABN to everyone who applied including individuals. The reasoning was that this supported tax compliance and auditing. The ATO can and does cross reference ABNs to bank account details and so on. This huge trawling of data enables, or should enable the ATO to check claimed business income against actual bank deposits and other transactions.

Over about the last few years this started to change. The ATO began to stop allocating ABNs to individuals. If someone’s a labourer for example, they now automatically have their ABN application rejected.

ABN applications can be done online through an ATO ‘decision making’ tool. The tool takes applicants through a series of questions to determine if the individual is an employee or contractor. As an applicant steps through questions, different answers trigger alternative additional questions. Eventually the tool will declare the applicant either an employee or contractor. If the declaration is ‘employee’ an ABN application is rejected.

More recently the ATO tool appears to have undergone fine ‘twigging’. It’s not noticeable to the casual observer but others familiar with the tool, differences are noticeable. Meanwhile, people applying as individuals are having difficulty obtaining an ABN. At Independent Contractors Australia we’ve been receiving a steady stream of information and complaints for around 9 months. People who want an ABN are being told ‘no’ on the basis of allegedly being an employee, according to the ATO.

In my view the legal basis for the ATO setting itself up as a God-like, online determiner of an individual’s employment status is highly questionable. The ABN legislation is clear that main objective of the ABN is to enable businesses to interact with the ATO for taxation purposes. The Act’s objectives do not include that an ABN is a determiner of employment or contractor status. It’s perhaps arguable that the way the ATO currently behaves is beyond its legislative authority.      

On a practical level the ATO is likely contributing to a growth of the black/cash economy and tax compliance headaches. The ATO automatically gives an ABN to individuals applying under a company, partnership or trust structure. Yet the ATO has tax compliance problems stopping illegal income splitting and tax avoidance with small companies and trusts.

And imagine the reaction of people who have their ABN application rejected? They either set up a sham company structure or operate in the cash economy, thus more easily avoid declaring their income.

On every measure the denial of ABNs works against the social and economic responsibilities of the ATO. Yet why is this happening? Look back to the objectives of the Australian union movement. Denying ABNs is a most effective way of using the power of government to suppress independent contracting.

Ken Phillips is executive director of Independent Contractors Australia and author of Independence and the Death of Employment.