CHANGES TO WAGE PENALTY RATES FROM 1 JULY 2017

There has been a bit of controversy surrounding the Fair Work Commission’s (FWC) decision to reduce penalty rates with their decision coming down on the 23rd February this year.  The changes take effect from the first full pay period from 1 July 2017.

The penalty rates proceedings commenced in early 2015 and considered over 450 submissions and statements. The proceedings were part of the 4-yearly review of the Modern Awards as required by the Fair Work Act 2009 to determine if the awards are meeting their objectives.

The decision affects the following Modern Awards ONLY:

• General Retail Industry Award 2010 [MA000004]
• Fast Food Industry Award 2010 [MA000003]
• Restaurant Industry Award 2010 [MA000119]
• Pharmacy Industry Award 2010 [MA000012]
• Hospitality Industry (General) Award 2010 [MA000009]

The Commission reviewed penalty rates applying to weekends, public holidays, and shiftwork. The Penalty Rates decision determined the existing Sunday penalty rates did not achieve the Modern Awards objective as they do not provide a fair and relevant minimum safety net of terms and conditions.  “Fairness” was considered in the context of employees and employers, and “relevant” in conveying suitability to current circumstances.

There were a number of arguments put forward concerned that the decision didn’t appropriately consider the impact the penalty rate cuts would have on employees’ living standards. The Commission has implemented transitional arrangements to mitigate the hardship. The Sunday penalty rates will be dropping by 25% or 50% depending on the specific rates in the updated Modern Awards with the changes phased in over 3 or 4 years.

For example the Sunday penalty rate for the full time and part time employees covered by the Hospitality Award will transition from 175% (rate at 30 June 2017) down to 150% from 1 July 2019 as follows:

• 1 July 2017                175% →170%
• 1 July 2018                170% →160%
• 1 July 2019                160% →150%

The Commission found the reduction in Sunday penalty rates are likely to have positive effects, such as longer trading hours and increased services available to customers.

The Full Bench in the Penalty Rates decision also decided to reduce the public holiday rates by 25%, however there will be no transition and the rates dropped immediately from 1 July 2017.

Many employee and industry groups were hoping employees would be able to apply for a Take-Home Pay Order, that is, employees were able to make submissions to the FWC after the introduction of Modern Awards to preserve their current pay entitlements where the Modern Awards would make leave them worse off.  However the FWC has decided not to allow Take Home Pay Orders for the penalty rate cuts as this would negate the intention of the penalty rate cuts.

If you would like more information on how the penalty rate changes may affect you, please refer to the materials and pay and conditions tools available on www.fairwork.gov.au/pay/penalty-rates-and-allowances/penalty-rates-changes-2017 or contact the Fair Work Ombudsman on 13 13 94.

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Q & A – PERSONAL SERVICES INCOME

Q: what is Personal services income (PSI)?

A: PSI is essentially any income earned from your personal skills or efforts regardless of your business structure (sole trader, partnership, company or trust). If PSI income has been received the relevant rules may apply to you.

If income earned through your business is deemed to be PSI then this income cannot stay in the entity, it must be paid out to the PSI individual as an ‘attributable wage’, in doing so reducing the net profit of the business to nil and preventing any form of income splitting. If the income is not deemed to be PSI the profits can stay within the entity and be taxed accordingly.

Occupations generally affected by the PSI legislation include:

• Builders
• Doctors
• Architects
• Engineers
• Cleaners
• Surveyors
• Consultants

Q: How to work out whether your income is PSI?

A: There are a series of steps in place to determine if these rules apply to you, as listed below.

First, you must determine if more than 50% of the income received from a particular job or contract was for your own services, labour, skills or expertise (as opposed to supply of materials and/or tools and equipment). If so, then all of the income from that job or contract is deemed as being PSI. If not, then the PSI rules do not apply to you.

If you do have PSI income then the below tests must be completed to ascertain whether or not you are running a Personal Services Business (PSB) and therefore allowed to retain the income in your entity:

The Results test – to satisfy the results test the following 3 conditions must be met for at least 75% of the income. If you pass this test the business income derived is not subject to PSI rules:

1. You must be paid to produce a specific result or outcome prior to being paid
2. You are required to supply the necessary plant & equipment or tools to complete the service
3. You are required to fix any mistakes at your own expense or pay someone else to fix them at any time during the contract

If you pass this first test then the PSI rules don’t apply to you. However, if you don’t pass this first test the following Steps are to be continued:

The 80% rule – For this step you must determine how much of the PSI income being tested comes from any one client/contract

1. If less than 80%, continue onto step 3
2. If more than 80%, PSI rules apply (unless you think you may be eligible for a special determination from the ATO) and any income earned will be attributable to you

If you do not pass the results test but do pass the 80% rule, then you will just need to pass any one of the three additional tests:

1. Unrelated clients test: Income received must be from at least two unrelated clients
2. Employment test: Do you employ someone who earns at least 20% of the business income?
3. Business Premises: Do you have a separate business premises used solely for your business (physically separate from your home and used exclusively for your business).

If you meet one of the above tests the PSI rules do not apply, if not the PSI rules will apply and any income earned will need to put included in your personal Tax Return as an attributable wage.

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