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Tax update on self-employed issues: Good news; bad news

Wednesday, July 15, 2015

Good news: Income splitting
ICA receives queries from self-employed people who have become caught up in the Personal Service Income Tax rules. They are denied tax deductions and prevented from sharing income with their spouses. With such queries we always first ask if they are a partnership. That’s because income-splitting by partnerships is legal and allowed by the ATO. However, some ATO case officers and many accountants don’t know this.

We explain this in our ICA members-only section. See here. We’ve just updated the information to include links to ATO publications confirming this. (If you're not currently an ICA member, you can join here for as little as $55 per year.)

Bad news: Construction contractors not paying tax!
In 2011 we were hugely critical of the government's introducing a massive new red tape transaction reporting system into the construction sector. It was/is designed as a tax sweep. Well, this tax sweep has generated huge income for the government.  

According to the ATO, this tax sweep pulled in an additional $2.3 billion in tax from construction subbies in 2012-13. In the ATO’s report the numbers are big:
  • 76,000 contractors still have not lodged 2012-13 tax returns  
  • 53,000 contractors seem to have underreported their incomes.
  • 84,0000 contractors didn’t report GST receipts.
At ICA we’re critical of the ATO on many fronts for the way they treat self-employed people. But blatant under-reporting and non-reporting of tax is unacceptable. Fair’s, fair! A healthy society depends on people being honest—and that includes declaring and paying tax. When a society gets really sick and everyone plays tax-dodge games, Greek-type scenarios unfold.  

ATO debt collection systems
It’s obvious. Everyone must may their tax. But there must be confidence in the way the ATO enforces tax collection. And on this, the government’s independent tax system’s reviewer, the Inspector General of Taxation, has issued a new report showing that the ATO needs to lift its game. Yes, the report says that “…individuals and micro businesses … account for approximately 60 per cent ($12.3 billion) of total collectable tax debt.” But given that small businesses alone account for 96% of all businesses, it could indicate that individuals and small businesses are under-representative of ATO tax debt. 

The report says “The ATO has acknowledged that its previous approach to debt collection was ‘random and ad hoc’”. It’s important that tax collection processes are fair, consistent and are seen to be compliant with the law. This particularly applies to small business people who have almost no capacity to understand complex tax law.

 

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