Understanding the bright-line test

The bright-line test is a clearly defined rule that leaves little or no room for varying interpretations.

Would a bright-line test provide certainty in tax law – or could it erode PAYG?

An expression that seems to have made its way into the tax law lexicon in recent times is that of the bright-line test.

Also known as the bright-rule test, Wikipedia helpfully provides some guidance here, describing it as a clearly defined rule or standard composed of objective factors, that leaves little or no room for varying interpretation.

Such tests are unambiguous and provide certainty in the application of the law.

My introduction to the phrase was in 2015, when the New Zealand Government introduced a bright-line test that is used by our friends at Te Tari Taake (roughly defined as “the house that takes”), or the Inland Revenue Department, to determine if New Zealand residents must pay tax on profits from the sale of residential properties. 

Depending on when the property was bought and sold, the vendor needs to consider if it is taxable under either a two-year or five-year bright-line test.

Business or hobby?

More recently in Australia, the expression was used a number of times as part of the consultations and final report of the federal government’s Black Economy Taskforce.

For example, the taskforce considered whether a bright-line test was appropriate for the business/hobby distinction, and even if a specific test should be brought in for the sharing economy – but these ideas were ultimately not pursued.

Sham contracting

A second example relates to the taskforce’s consideration of the uncertainty that frequently arises in tax and other laws regarding the employee/contractor tests, in particular, sham contracting.

It concluded: “The Commonwealth and the States should work together to harmonise or bring greater consistency in this area. There should be a uniform bright-line test used to determine when these obligations must be paid for some contracting services. We appreciate how difficult in practice this will be, but this is a necessary task.”

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Is it likely that Australia will see a new bright-line test for contractors any time soon? I suggest this is very unlikely indeed, as while such certainty can be helpful – and nice to have in many circumstances – thankfully it is not always the primary objective in decision-making. There are often other issues to be considered. 

For example, in the case of business/hobby such a test would enable people to perhaps position themselves on the hobby side of the equation for the accompanying tax benefits.

In the case of employee/contractor tests, the provision of such bright-line certainty in the law could lead to PAYG erosion because it may enable employees to reposition themselves as contractors.

Given the contribution personal taxes make to the overall government revenue pie, this could have long-term systemic and detrimental implications for the overall tax framework.

Notwithstanding the unlikely outcome of any bright-line legislative changes in these areas, on behalf of members, CPA Australia has offered to work with the Australian Taxation Office to redevelop tools and guides for taxpayers based on the current laws.

Stay in touch

CPA Australia’s policy team welcomes feedback and comments. Visit the policy pages at CPA Australia for more details about our submissions, plus information about open consultations and the latest policy bulletins and newsletters.

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October 2018
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