IR35 variant hits IT Workers in Australia

The 'Alienation of Personal Services Income' (APSI) legislation came into effect in Australia last year, with the first deemed payments being made shortly. The measures were introduced to improve the fairness of the income tax system and prevent erosion of the revenue base. APSI is designed to restrict individuals in receipt of personal services income from claiming more deductions than they are entitled to and from taking advantage of lower tax rates by having personal services income channelled through to an entity such as a company, partnership or trust.

Norman Lacy, the executive director of the Information Technology Contract and Recruitment Association (ITCRA), told the Australian media that the law was clearly discriminatory against recruitment firms and placed contractors in a difficult position where they were at risk of being fined. Mr Lacy said that "If a change isn't made, no matter how careful and considered the Government is in introducing its reforms, the contractors are going to feel it."

Unlike IR35, the Australian Tax Office (ATO) have devised three tests for determining whether an individual or a personal services entity is conducting a personal services business in an income year. Generally, at least one of these personal services business tests must be met. The questions asked before embarking on the Self-Assessment Guide, in which the 'employment test' is contained, are:
  1. This income year, do you expect to have personal services income? Personal services income is a reward for the personal skills and effort of an individual. It includes income from producing a result from personal efforts or skills. Income is still personal services income even if that income is paid or payable under a contract.
  2. This year, do you expect that 80% or more of the individual's personal services income will come from one source?
If 80% or more of the income comes from one source then the individual is not entitled to 'Self-Assessment'. The individual must then fill in an application form to pay the income tax, and deductions claimed against the income are limited. If, however, the individual answers 'yes' to the first question and 'no' to the second then they are entitled to self-assess. The Self-Assessment Guide for establishing whether a person will pass the 'Employment Test' is made up of four questions:
  1. Do you expect to have one or more apprentices for at least half of this income year?

  2. If you are an individual: this income year, do you expect to engage an entity/ies, other than associated entities that are not individuals, to perform work?

  3. At all times in the income year, will the personal services income be produced from activities mainly conducted at business premises?

  4. This income year, do you expect to obtain income from two or more unrelated clients, as a direct result of your making offers or invitations to the public to provide your services?
A stern warning is given at the end of the form: "You do not offer services to the public merely by being on the books of a labour hire firm or placement agency."

The test for passing APSI is very simplistic and leaves no room for uncertainty. So, considering this maybe uncertainty in the 'Employment Status Test' under IR35 is a good thing. At least with the wealth of case law there is room for argument and you get a fair crack of the whip.

Independent contractors in the United States have to comply with IRS 1706. This legislation has been in force for quite sometime and is specifically aimed at those in the technology industry. This makes it uniquely difficult for the industry to hire computer and engineering professionals who want to work as independent contractors.

IRS 1706 removed so-called "Section 530 employment tax safe havens" that apply to all other types of businesses using independent contractors. As a result, if a technical services firm hires a high-tech worker to perform services for that firm's customers as an independent contractor, then the firm must prove to the IRS that this worker is an independent contractor under the centuries-old "common law" employment test.

It would seem then, that restricting the provision of personal services through a limited company is wide-spread. The Australian test is far harsher and the UK and US tests are both based on 'common law' but, at least the IRS had the good grace to admit they were targetting a certain industry.