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Can I use a company structure or trust to receive income from contracting?

Sun, 04 Aug 2024 04:21:39 GMT

Can I use a company structure or trust to receive income from contracting?

We often get asked by professional contractors about the benefits of setting up a Company or Family Trust and billing the agency or client for contracting revenue.

It's a great question and one that depends on the Personal Services Income legislation (PSI). This isn't about your status as a 'Contractor'. Even if you meet all the criteria and definition of contracting, it's about how the ATO treats the payments for tax purposes - as business income or personal income.

Let us help you navigate this and figure out the best option for you. You need to earn business income to reap any benefits.

What is PSI Legislation?

Personal services income (PSI) is income produced mainly from your personal skills or efforts as an individual. The ATO created rules around PSI to ensure that individuals earning income in this manner cannot abuse the tax system. This includes things like diverting your income through a business structure to different beneficiaries, accessing company tax rates, or having another business entity take on your losses.

The ATO has created a few steps in ascertaining you are income is a PSI or business income. Here are some details from ATO;

When working out if the personal services income (PSI) rules apply, you need to look at the income received from each separate contract or job to determine if you have received PSI. If you have received PSI (including if you have received it through a company, partnership or trust), you then need to work out if the PSI rules apply to that income.

Step 1. Have you earned a PSI

Look at the income you have received from each individual invoice or contract.

Has more than 50% of this income been generated from your personal skills, labour, or expertise? If so, the total amount of income for that invoice or contract is classified as PSI. Go to step 2.
If none of your invoices or contracts are classified as PSI, then the PSI rules don’t apply to your business.

Step 2 – The Result Test

To pass the results test in an income year, you need to answer yes to all the three conditions below:

· Paid to produce a specific result or outcome per the contract

· You are required to provide the equipment or tools to undertake the work.

· Are you required to fix defects or mistakes at your own costs per the contract?

If you answer yes to all the above, then your business is a personal services business (PSB) for that income year and the PSI rules don't apply.

Step 3- The 80% Rule

Should you fail Step 2, then test needs to be passed. For this step, you need to work out the amount of PSI that comes from each client (including their associates) in an income year. If you are paid by a labour hire firm, the labour hire firm is treated as your client.

If you are a company, partnership or trust and you have more than one individual generating PSI, the 80% rule applies to each individual. You need to look at the amount of PSI that you receive for each individual and how much of that amount comes from one client.

The ATO and the courts have clearly mentioned that working through two or more recruitment agencies does not automatically help pass you on this test.

Step 4 – The Other Tests

If you pass one of these tests, then PSI rules do not apply to your business:

Unrelated clients test. If you complete work for two or more unrelated clients, and you’re actively seeking out new work — whether it’s through your website, referrals, tenders, etc — then you pass the test.
Employment test. If you hire a contractor or employee to complete 20% or more of your billable work — excluding bookkeeping or administrative tasks — then you pass the test.
Business premises test. If you run your business operations from separate premises to your other work, then you pass the test.

If you do not pass at least one of these tests you can apply to the ATO for a PSB determination.

Please note that this is a general guide for contractors and is not to be treated as tax or financial advice. Please talk to your financial / tax advisor for specific advice.

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Summary of changes impacting independent contractors from 24th August 2024

Tue, 23 Jul 2024 04:04:59 GMT

Summary of changes impacting independent contractors from 24 ^th August 2024

On the 24 ^th of August, new definitions for independent contractors in the Fair Work Act 2009 will take effect, which could impact existing contract agreements.

The changes apply to how an independent contractor is defined, with the Fair Work Commission applying broader considerations to determine whether someone is an employee or an independent contractor.

New Definition for Independent Contractors

Instead of concentrating on the contract's terms, evaluating whether an individual is an independent contractor will depend on how they execute the contract . These changes emphasise the practical reality and true nature of the working relationship rather than relying solely on written agreements.

Ability to opt-out of the new definition

Contractors earning above the high-income threshold (which was $175,000 at 1 July 2024) can exclude themselves from the new definition . If the employer permits, these contractors can decide to maintain their existing relationship.

Change to the defenses for sham contracting

Sham contracting occurs when an employee arrangement is misrepresented as an independent contractor arrangement to avoid providing employee entitlements.

The previous defence, which required employers to prove they were neither aware nor negligent about the employment status, has been updated. Now, employers must show that they had a 'reasonable belief' that an independent contractor arrangement was suitable at the time of engagement.

Ability to appeal unfair contract terms

From August 24, independent contractors will be able to appeal the Fair Work Commission if they believe their services contract contains an unfair contract term.

The commission will be able to determine whether a term in a services contract is unfair and order the contract aside, amended, or varied. The laws only apply where the contractor performs work under a services contract with a Pty Ltd or Ltd company and if they are below the contractor's high-income threshold.

Minimum standards for contractors for certain workers

There are new laws for contractors who undertake certain work, including those who undertake ‘employee type work’ on digital platforms and those who work in the road transport industry . These contractors are referred to as ‘regulated workers’.

To be considered a regulated worker, an employee-like worker or contractor in the road transport industry must

be a party to a services contract (either as an individual or as a member of a body corporate, trust or partnership)
perform all (or a significant majority) of the work under the services contract
not perform any work under the services contract as an employee.

These changes only apply when the regulated worker works under a services contract with an organisation with Pty Ltd, or Ltd within their business name.

A summary of the changes for independent contractors by the Fair Work commission can be found here .

What are the penalties for non-compliance?

The penalties for non-compliance were increased on February 27 ^th 2024 with the maximum civil penalty reaching $469,500 for sham contracting and underpayments. For severe breaches this can increase to $4,696,000.

General Disclaimer

The information provided above is on the understanding that it is for illustrative and discussion purposes only. Any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure its relevance to your specific personal and business requirements and circumstances.

Key signs it's time to consider transitioning from sole trader to company owner

Thu, 20 Jun 2024 23:47:02 GMT

Key signs it's time to consider transitioning from sole trader to company owner

Navigating the employment landscape as a contractor in Australia offers a sense of freedom and autonomy that's hard to match.

However, there comes a pivotal moment in every contractor's journey when the structure that once provided endless advantages may start to feel like it's holding you back. This transition from a sole trader to a company owner marks a significant milestone in your business life, opening the door to a world of new possibilities and growth. It's akin to the business coming of age, stepping into a realm that offers new opportunities, protections, and a promising potential for growth.

Knowing when to make this leap can feel like navigating uncharted waters. You might ask, "Is now the right time?" or ponder the tangible benefits this shift could bring to your business. Recognising the signs that it's time to transition is crucial, as is understanding the legal and financial landscapes that will shape your journey forward. This article is here to guide you through this process, providing the support and information you need to make this transition with confidence.

When considering the transition, it’s crucial to grasp the difference between these two structures, the legal and financial considerations to keep in mind, and the steps you'll need to take. This understanding will not only make the transition smooth but also ensure it's beneficial for your business's future, helping you avoid potential pitfalls and make informed decisions.

Understanding the Differences Between a Sole Trader and a Company

Legal Liability

One of the key differences between operating as a sole trader and as a company is legal liability. As a sole trader, you and your business are legally considered the same entity. This means that any debts or legal issues the business encounters are directly linked to you as an individual. Your personal assets, including your home and savings, could be at risk if your business runs into trouble. On the other hand, a company operates as a separate legal entity. This structure provides limited liability, meaning your personal assets are protected, and your risk is limited to the amount of money you've invested in the company. This separation can offer peace of mind and a safety net that many find invaluable as their business grows.

Taxation

The way you are taxed is another area where significant differences emerge. Sole traders are taxed as individuals, with their business income treated as personal income. This method can push successful sole traders into higher tax brackets, leading to potentially higher tax obligations. Conversely, companies are taxed separately from their owners. In Australia, companies benefit from a fixed corporate tax rate, which is often lower than the highest personal income tax rate. This distinction can lead to substantial tax savings and is a crucial consideration for businesses that have outgrown the sole trader model.

Control and Decision Making

As a sole trader, you enjoy complete control over your business. Decisions are yours to make, without the need to consult others unless you choose to seek advice. This autonomy can be highly appealing, offering the freedom to pursue your vision directly. Transitioning to a company structure can introduce a more complex decision-making process. Companies are required to have one or more directors and potentially shareholders, depending on the structure chosen. These stakeholders may have a say in the business direction, which can dilute your control but also brings the benefit of shared expertise and responsibility.

Operational and Administrative Requirements

Finally, it's important to consider the differences in operational and administrative requirements. Sole traders benefit from simplicity in this area, with fewer formalities, reporting requirements, and overall administrative burdens. The flip side is that companies face more complex regulatory and reporting obligations, including the need to lodge annual returns, maintain financial records, and comply with the Corporations Act 2001. The area of managing financial affairs and administration is where Eleva aims to really help contractors. Our service includes complete management of the bookkeeping and accounting for contractors so those administrative challenges are removed and the cost of lodging both personal and company tax returns is reduced.

Key Signs Indicating the Need for Transition

Navigating the shift from sole trader to a company owner in Australia is not merely about reaching a certain revenue threshold or business size. It's about recognising when your business model stretches beyond the benefits of sole trading and begins to tap into the realm where corporate structure provides more advantages. Here are some key signs that indicate it's time for you to consider this pivotal transition:

Business Growth Exceeds Sole Trader Advantages

As your business expands, the simplicity and ease of being a sole trader may start to clash with the complexity of your operations. If you find yourself in need of more capital, looking to hire employees, or simply outgrowing the administrative capabilities of a sole trader, it's a sign to consider the company structure. Companies offer the ability to raise capital through the sale of shares, and the separation between personal and business liability means your personal assets are better protected as your business grows and takes on more risks.

Seeking Tax Efficiency

The tax implications of operating as a sole trader versus a company in Australia can be significantly different. Sole traders are taxed at individual income rates, which can be as high as 45% for earnings over a certain threshold. In contrast, companies are taxed at the corporate rate, which is generally lower. If your business profits are reaching a level where you're being taxed heavily as a sole trader, transitioning to a company could offer more favourable tax treatment and opportunities for tax planning, such as splitting income among family members or opting for salary sacrificing.

Desire for Professionalism and Credibility

Operating as a company rather than a sole trader can elevate the professional image of your business. The perception of your business can shift dramatically in the eyes of clients, suppliers, and potential investors when it operates under a corporate structure. The "Pty Ltd" or "Ltd" at the end of your business name signals a level of seriousness and commitment to your enterprise and builds trust and credibility. This could be the key to unlocking doors to larger contracts and opportunities that you might not have had access to as a sole trader.

Understanding these signs and assessing where your business stands is crucial in making an informed decision about your business structure. Transitioning from a sole trader to a company owner is a significant move that involves careful consideration of legal, financial, and operational implications. However, recognising when you've reached this juncture can propel your business into its next phase of growth and success.

Company structure is required for larger contracts

Hiring a contractor under a company structure rather than as a sole trader has benefits for employers who are looking for assistance with larger contracts that require a high level of expertise. Often, these contracts require the contractor to have professional indemnity and Workcover (workers compensation) insurance. Workcover insurance is compulsory for companies in all states of Australia and can often be a requirement for a contractor to secure an opportunity. Professional indemnity is also common under company structures, which can make a company contractor more attractive for a role, as opposed to a sole trader who may or may not have this level of insurance.

For contractors, transitioning from sole trader to company owner is a significant leap that can redefine their business future. It's a strategic step towards safeguarding their personal assets, enhancing their business's credibility, and unlocking new avenues for growth and funding opportunities. Operating as a company offers professionalism and trust that customers and investors value highly. It opens doors to larger projects and markets previously out of reach, laying down a foundation for sustained success.

General Disclaimer

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Power Up Your Tax Deductions with this Guide for Contractors

Wed, 12 Jun 2024 04:34:03 GMT

Power Up Your Tax Deductions with this Guide for Contractors

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As a contractor in Australia, you can maximise your tax deductions and boost your profits. By understanding the tax system, keeping detailed records, and employing strategic planning, you can reduce your taxable income and increase your take-home pay. This comprehensive guide covers everything from identifying your contractor status to optimising your tax deductions.

Who is a Contractor?

A contractor in Australia is an individual or business that provides services to others for a fee and is not considered an employee. Contractors can work in various industries and professions, such as construction, IT, marketing, and consulting. Typically, contractors operate under a specific contract or agreement with clients, outlining the scope of work, payment terms, and other important details. As a contractor, you have more freedom and flexibility than employees, but you're also responsible for managing your own taxes and business expenses.

Tax Deductions you can claim as a contractor in Australia

As a contractor, you're entitled to claim various tax deductions on your income tax return. These deductions can significantly reduce your taxable income, allowing you to retain more of your hard-earned income. Here are some common tax deductions available to contractors:

Work-related expenses, such as tools, equipment, and protective clothing
Travel expenses , including vehicle costs, public transport fares, and accommodation
Home office expenses , if you work from home or use a dedicated space for your business
Professional development costs , including training courses, seminars, and conferences
Business insurance premiums , such as public liability and income protection
Depreciation on assets purchased for your business, like computers, vehicles, and machinery
Advertising and marketing expenses, including website development and promotional materials
Subcontractor and employee costs , if you hire others to help with your work

Keeping detailed records of financial activity

To make the most of your tax deductions, keeping accurate and detailed records of your financial activity is crucial. This includes maintaining receipts, invoices, and other documentation related to your business expenses and income. Here are some key tips to help you stay organised and improve the accuracy of your tax return:

Develop a dedicated system for tracking and storing your financial records. Keep copies of all your receipts, invoices, and other documentation and share them with Eleva.
Regularly review your financial records and make updates as needed.

Considerations for business tax deductions

When claiming tax deductions for your contracting business, it's important to consider the various rules and limitations set out by the ATO. Here are some key points to keep in mind:

You can only claim deductions for expenses that are directly related to earning your income as a contractor. Personal expenses, such as entertainment and personal grooming, are not deductible.
You must apportion your deductions if an expense relates to both work and personal use. For example, if you use your mobile phone for both business and personal calls, you can only claim a deduction for the portion of your phone bill that relates to your contracting work.
You cannot claim deductions for expenses that have been reimbursed by your clients or another party. This includes any allowances you receive from your clients to cover specific expenses, such as travel or equipment costs.

Maximising your tax deductions

To make the most of your tax deductions as a contractor, it's crucial to develop a thorough understanding of the tax system and the various deductions available to you. This involves researching the ATO's guidelines, seeking professional advice, and constantly reviewing your financial records to ensure you're claiming all relevant deductions.

Tips for optimising your tax deductions

Here are some practical tips to help you optimise your tax deductions and boost your profits as a contractor:

1. Stay organised and maintain detailed records of your income and expenses with Eleva.

2. Plan ahead and consider the tax implications of your business decisions. This may involve purchasing assets before the end of the financial year or deferring income to a later tax period. Your Eleva Accountant can provide advice on this.

3. Seek professional advice from Eleva if you are unsure. Eleva can help you navigate the complex tax system, identify additional deductions, and ensure your tax return is accurate and compliant.

By understanding the tax system and making the most of your tax deductions, you can significantly boost your profits as a contractor in Australia. With careful planning, record-keeping, and professional advice, you can minimise your tax obligations and maximise your take-home pay. So take advantage of these opportunities and power up your tax deductions today!

Please note that this is a general guide for contractors and is not to be treated as tax or financial advice. Please talk to your financial / tax advisor for specific advice.

Do sole traders pay more tax than company owners?

Sat, 01 Jun 2024 01:35:09 GMT

Do sole traders pay more tax than company owners?

When it comes to taxes, there are some differences between being a sole trader and owning a company in Australia. However, whether one pays more tax than the other depends on a range of factors, including income, expenses, and business structure.

Sole Traders and Tax

As a sole trader, you are taxed on the income you earn from your business. This income is added to any other income you earn during the financial year, such as from employment or investments, and taxed at your personal income tax rate.

One of the benefits of being a sole trader is that you can claim deductions for any expenses incurred in running your business. This means you can offset some of your business expenses against your income to reduce your tax liability.

It's important to keep accurate records of your income and expenses as a sole trader, as you are required to file an annual tax return with the Australian Taxation Office (ATO).

Company Owners and Tax

As a company owner, your company is taxed separately from you as an individual. The company pays tax on its profits at the current company tax rate of 25%, which is lower than the top personal income tax rate of 47%.

If you receive a salary or dividends from your company, you will also be taxed on this income at your personal income tax rate. However, as a company owner, you can potentially reduce your tax liability by taking advantage of tax deductions and other tax planning strategies.

It's important to note that there are additional tax obligations and reporting requirements for companies in Australia, including filing an annual tax return with the ATO and complying with GST and PAYG withholding obligations.

Which Pays More Tax?

The question of whether sole traders pay more tax than company owners depends on individual circumstances. Generally speaking, if a sole trader and a company owner earned the same amount of income, the company owner would pay less tax due to the lower company tax rate.

However, this is not always the case. It's important to consider individual circumstances, as well as the expenses and deductions claimed by both sole traders and company owners.

In addition, it's important to note that tax is not the only factor to consider when choosing a business structure. Other factors, such as liability, compliance, and growth potential, should also be taken into account.

Conclusion

In conclusion, whether sole traders pay more tax than company owners depends on individual circumstances. While company owners can potentially pay less tax due to the lower company tax rate, there are additional tax obligations and reporting requirements for companies. It's important to seek professional advice when choosing a business structure to ensure you make an informed decision that is right for your individual circumstances and business goals.

Please note that this is a general guide for contractors and is not to be treated as tax or financial advice. Please talk to your financial / tax advisor for specific advice.

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Contracting as a Sole Trader vs Company Owner. What are the benefits?

Mon, 20 May 2024 02:40:02 GMT

Contracting as a Sole Trader vs Company Owner. What are the benefits?

Being a contractor is a popular career choice in Australia, as it allows individuals to work for themselves and have greater control over their work. However, when it comes to structuring their business, many contractors are faced with a choice: should they operate as a sole trader, or should they register a company?

In this blog post, we'll explore the benefits of being a contractor under a company registration as opposed to a sole trader in Australia.

First, let's define the two structures.

A sole trader is an individual who operates a business on their own, without forming a separate legal entity. A company, on the other hand, is a separate legal entity that is owned by its shareholders and operates under its own name.

Now, let's dive into the benefits of each structure:

Benefits of being a contractor as a sole trader in Australia

Simplicity : One of the biggest benefits of being a sole trader is the simplicity of the structure. There are no formal registration requirements or ongoing compliance obligations (other than tax reporting), making it easy to set up and run a business as a sole trader.
Flexibility : Sole traders have the flexibility to make decisions about their business without consulting others, and can change the direction of their business quickly and easily.
Control: As a sole trader, you have complete control over your business, including its finances, branding, and operations.
Tax benefits: Sole traders can claim tax deductions for a wide range of business-related expenses, which can reduce their taxable income.

Benefits of being a contractor under a company registration in Australia

Limited liability: One of the main benefits of operating as a company is limited liability. As a shareholder of a company, your personal assets are generally protected from the debts and liabilities of the business. This means that if the company runs into financial trouble, your personal assets (such as your home or car) are not at risk.
Professional image: Operating as a company can give your business a more professional image, which can help to attract clients and win contracts.
Tax advantages: Companies are subject to a lower tax rate than individuals, with the current company tax rate in Australia being 30% for most businesses. This means that companies can potentially pay less tax on their profits than sole traders.
Easier access to finance: Companies are generally viewed as more credible and financially stable than sole traders, which can make it easier to secure financing from banks and other lenders.
Opportunities for growth: Companies have the ability to issue shares and raise capital, which can provide funding for growth and expansion.
Employee benefits: Companies can provide benefits such as superannuation and workers' compensation to their employees, which can help to attract and retain top talent.

In summary, there are benefits to both operating as a sole trader and as a company when working as a contractor in Australia. Sole traders offer simplicity, flexibility, control, and tax benefits, while companies offer limited liability, a professional image, tax advantages, easier access to finance, opportunities for growth, and employee benefits.

Ultimately, the choice between the two structures will depend on factors such as the size and complexity of the business, the level of risk involved, and the individual's personal preferences and goals. It's important to seek advice from a qualified accountant or business advisor before making a decision.

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eleva

Can I use a company structure or trust to receive income from contracting?

Can I use a company structure or trust to receive income from contracting?

What is PSI Legislation?

Step 1. Have you earned a PSI

Step 2 – The Result Test

Step 3- The 80% Rule

Step 4 – The Other Tests

Summary of changes impacting independent contractors from 24th August 2024

Summary of changes impacting independent contractors from 24 th August 2024

Key signs it's time to consider transitioning from sole trader to company owner

Key signs it's time to consider transitioning from sole trader to company owner

Understanding the Differences Between a Sole Trader and a Company

Power Up Your Tax Deductions with this Guide for Contractors

Power Up Your Tax Deductions with this Guide for Contractors

Do sole traders pay more tax than company owners?

Do sole traders pay more tax than company owners?

Contracting as a Sole Trader vs Company Owner. What are the benefits?

Contracting as a Sole Trader vs Company Owner. What are the benefits?

Summary of changes impacting independent contractors from 24 ^th August 2024