Contracting in Australia shares many similarities with what contractors experience in the UK. However, there are important differences, particularly in how Australian-based contractors are categorised and taxed.
In this interview with ContractorCalculator, Independent Contractors of Australia (ICA) executive director and co-founder Ken Phillips explains how the number of independent self-employed workers in Australia has grown to have a powerful voice.
“One in five workers is self-employed, and this rises to nearly one in three in the private sector. Altogether, there are now 2.1m self-employed workers, which is 19.1% of Australia’s workforce,” explains Phillips. “That means that independent contractors can be the difference between politicians winning or losing elections, so policymakers now ignore the sector at their peril.”
But Phillips highlights how there is still work to be done, particularly with Australia’s equivalent of HMRC, the Australian Taxation Office (ATO). Recently, for example, the ATO has been circumventing the country’s Personal Service Income (PSI) rules to apply its own ‘smell test’ to target contractors for investigation.
Baseline market data assists lobbying efforts
From the ICA’s inception, Phillips understood that it required firm statistical data for its lobbying efforts on behalf of Australian contractors to be successful. As a result, statistical research conducted in partnership with a number of organisations, including Monash University, is one of the ICA’s core activities.
“In 2002 when we launched ICA, gathering accurate data about the size of the self-employed sector was a challenge,” says Phillips. “Different data-gathering organisations used differing definitions of what self-employment meant and what constituted an independent contractor.”
Successive research projects and changes in methodology by the Australian Bureau of Statistics have improved the scope and quality of data to the extent that the self-employment sector is now well profiled.
Independent contractors can be the difference between politicians winning or losing elections, so policymakers now ignore the sector at their peril
Ken Phillips, ICA
“Not only do we know how many self-employed workers there are, but we also have a much clearer picture of the sectors in which they operate and demographics. This level of detail has dispelled some myths about independent contractors and has become a powerful tool when lobbying,” adds Phillips.
Limited avoidance industry as PSI rules are well understood
A key campaign spearheaded by ICA has been for tax clarity. Australia’s General Anti Avoidance Provisions (GAAP), Pay As You Go (PAYG) withholding taxes and its rigid PSI rules have taken the focus of the debate about the flexible workforce away from tax.
Phillips explains: “Taking tax largely out of the self-employment debate allows a focus on the benefits that independent contractors bring to the Australian economy. We campaigned for a simpler and easier to implement tax framework. When compared to the UK’s IR35 services sector, Australia now has a relatively small avoidance industry focusing on the very wealthy”
And a result of many years of lobbying by ICA is a simple definition of self-employment: quite simply, a worker is classed as self-employed if they are working under a commercial contract. However, as in the UK, Australian lawmakers have shied away from legislation that would provide statutory definitions of employment and self-employment.
ATO ‘smell test’ arbitrarily applied to contractors
But Phillips warns that Australian contractors by no means have a free ride. He points out that the ATO can be as arbitrary in its treatment of independent contractors as HMRC is in the UK. For example, ATO sometimes ignores the rules to apply its own ‘smell test’ when determining employment status.
And it is difficult for contractors in Australia to take on the taxman. “There is no tax investigation insurance tradition within the Australian small business sector, like there is in the UK,” says Phillips. “This means that, although there is a tax ombudsman and recourse to the courts, few contractors can take on ATO once it has ruled on a tax settlement, because the costs are prohibitive.”
This leads to Australia’s tax authorities often having the upper hand, with Ken noting that the ATO ‘plays dirty’ at times, intimidating contractors into paying more tax than they should. “The ATO can decide during an inspection not to allow a contractor’s travel expenses. For engineering and technical contractors working in the mines in Western Australia and flying out every few weeks and paying for accommodation, this can be a huge cost to their business, and their pockets.”
The ATO can also be self-appointed judge and jury, says Phillips: “This leads to its application of the PSI rules sometimes bordering on lunacy. The tax commissioner can decide that something happened, even if it did not, and that something did not happen, even if it did! Tackling these abuses by the ATO remains a core ICA objective.”
Lessons for the UK
Whilst Phillips admits that the Australian environment for independent contractors is not completely free from challenges, there are key areas where Australian progress might serve as lessons for the UK sector:
“Disengaging tax from the flexible working debate, establishing tax clarity under PSI rules and having access to hard statistical data about the size and composition of the Australian self-employed – which represents a larger percentage of the workforce than in the UK –has enabled us to significantly advance the cause for independent contractors.
“Self-employment and the flexible workforce are what will deliver sustainable economic growth in the future, which is the case both in Australia and in the UK,” says Phillips. He concludes: “There is every indication that, like Australia, the size of the UK’s contracting and freelance workforce is only going to increase; so the sooner that issues such as IR35 are tackled, the sooner flexible workers can focus on what’s important: growing their businesses and the economy. ”