The real sham in Shorten's super plan

Thousands of workers and employers who are already battling the government's confusing superannuation arrangements for contractors could become collateral damage in a renewed attack on 'sham' contracting.

'Sham' contracting is bad, obviously. It's when someone engages a 'contractor' in the full knowledge that the individual is really an employee. The trouble for the self-employed and the businesses they deal with is the legal definitions for 'sham' contracting are so vague that many innocent parties are already being harassed by the Australian Taxation Office.

And their task is about to get harder. After Labor's welcome decision to drop its attack on the right of self-employed people to equitable tax treatment under the Personal Services Income tax laws, Assistant Treasurer Bill Shorten looks set to reignite the attack on 'sham' contracting.

According to media reports, Shorten is preparing to announce beefed up compliance by the ATO under superannuation guarantee laws following high level talks with, and demands from, the union movement.

What's not widely known is that the ATO's already aggressive superannuation compliance activity is in many instances a sophisticated revenue grab by the federal government. It's a process by which the government denies large numbers of self-employed people equitable access to tax deductibility of their personal superannuation contributions.

It's raking in enormous amounts of tax revenue and it works like this.

The ATO has a legislative requirement to require engagers of labour to withhold 9 per cent of individuals' incomes to be paid into superannuation accounts. However, where a business engages self-employed people no superannuation payments are required under law. The self-employed person simply charges more and then handles their own superannuation.

But, if the work is "wholly or principally for labour” superannuation may still have to be withheld from the worker. What 'wholly and principally for labour” means can only be understood through a detailed knowledge of case law. Where businesses fail to pay superannuation under these circumstances the Assistant Treasurer is labelling such failure as 'sham' contracting.

In many cases it's no 'sham', but the fault of badly drafted and confusing laws, the interpretation of which is largely at the administrative discretion of the ATO, which is about to be beefed up.

The ATO is already aggressively auditing businesses declaring that superannuation should have been paid. Businesses are being hit with massive back bills for superannuation plus penalties. The government's tax grab occurs because of a little known tax law called the '10 per cent rule'.

Ordinarily if you are entirely an employee or entirely self-employed in a year you are allowed to make personal superannuation contributions up to certain limits ($25,000 up to 50 years old and $50,000 over 50 years old). The contributions are tax deductible against your personal income. It's designed to encourage people to save for their retirements.

But the 10 per cent rule states that if you work as a mixture of employed and self-employed in a year you are denied tax deductibility on any personal superannuation contributions. It's blatant discrimination against the thousands of people who might have a mixture of work in a year.

Here's the sting. The ATO is auditing businesses for non-payment of superannuation under the complex 'wholly and principally for labour' rule. Businesses that have already paid contractors, are effectively being stung for additional superannuation when they have already paid superannuation 'in kind'. Many businesses have gone bankrupt over this and that's just sting number one.

Sting two is where the ATO declares the independent contractors to be employees. And because the contractors have, in the ATO's eyes, worked as a mixture of employee and independent contractor the 10 per cent rule kicks in. The ATO retrospectively disallows superannuation tax deductibility and sends additional tax bills with penalties to the self-employed people. Distraught self-employed people have been contacting us.

The Howard government actually outlawed sham contracting in 2006 and these laws were replicated in Gillard's Fair Work Act. The Fair Work Ombudsman has been conducting aggressive audits for sham contracting since about 2007 with about two successful known prosecutions to date. The unions' hated Australian Building and Construction Commission is also scouring for sham contracting in the construction sector.

But to label alleged non-compliance with the superannuation laws as a 'sham' is a sham in itself. Particularly when combined with the inequitable 10 per cent rule the government looks two-faced. It alleges shams but engages in a questionable tax grab against self-employed people damaging the very people it piously says it protects.

If the government is genuine it would abolish the 10 per cent rule and restore tax equity. It should fix the superannuation rules so that the law is clear and people know how to comply.

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