Budget could mean more paperwork for contractors
Sole traders may have to pay tax monthly, not quarterly
Australia's 2013/2014 budget could mean extra work for IT contractors.
Such workers are often considered “sole traders” or “independent contractors” for tax purposes and are currently required to submit quarterly payments for the goods and services tax (GST) and personal income tax. Australia has around 750,000 independent contractors and nearly a million on-employing businesses, many of which are sole traders. It's hard to say how many of those work in IT, but this (.XLS) data from the Bureau of Statistics suggests 193,000 are "Professionals" and 116,000 work in "professional, scientific and technical services".
Anecdotally, several tens of thousands of Australians work as IT contractors.
New arrangements announced in the budget mean sole traders will soon be required to make income tax payments each month, as outlined here among “other key revenue measures”.
That won't cost IT pros money, but it will make being a freelancer or contractor less attractive.
To understand why, consider that a prudent contractor will set aside income tax whenever they are paid. Over a quarter, that tax becomes a decent sum that can be invested in a short-term interest-bearing account, or temporarily parked in an offset mortgage. The benefit from doing so is not enormous, but is still a benefit.
Monthly tax will mean contractors and sole traders don't accumulate as much tax and lose the chance to put it to work for their own purposes. Monthly payments will mean the government gains improved cashflow it says will boost its coffers by $1.4bn over the forward estimates.
Details of the new payments scheme have not been revealed, but it seems safe to assume monthly payments will mean more time is needed for taxation paperwork. Freelancers, sole traders and contractors may also gain an extra layer of paperwork, as the wording of the Budget papers says new laws will mean “monthly pay‑as‑you‑go (PAYG) income tax instalments”.
There's no indication GST payments will also go monthly. The two payments are currently integrated. There's no word on just how this will work, but the wording used suggests contractors could now face monthly income tax paperwork and also quarterly business activity statements for GST.
The language used in the Budget papers is fuzzy, as it mentions sole traders but then offers incomes well into the millions as the cut-of points for monthly payments. We're therefore trying to clarify just what the arrangements will be.
Ironically, the Budget also promotes the government's new tax reform plan, which reads, in part, as follows:
“A stronger tax system is also a simpler tax system. Unnecessary complexity reduces investment and hampers innovation, detracting from productivity and growth. Complexity reduces the time businesses and individuals can devote to other, more beneficial, activities such as exploring new commercial opportunities, securing a better job or spending more time with their family. It is also unfair as it disadvantages those who are less able to deal with it, particularly low income earners and small businesses.”
Just how monthly income tax payments won't detract from productivity or distract sole traders from "exploring new commercial activities" is not explained. ®
The author has for many years been eligible for quarterly PAYG payments, but will in no way advance his chance of personal gain by pointing out the new arrangements described in this story.