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Thursday, 29 July 2010 |
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ATO interpretation of PSI legislation
Friday, 20 May 2005
Until mid 2002 I had been contracting for many years (trading through a limited company), both here and in the UK, but it was becoming progressively more difficult to justify continuing. With issues such as the Personal Services Income legislation and fewer contracts in my market I decided to take up the offer of a permanent position and closed down my company.
Around 18 months ago the ATO decided in their wisdom to conduct an audit on my company’s and my own tax affairs during the last few years of my contracting business. That audit has just recently finished and I thought it would be worthwhile recounting a couple of surprising things I have discovered during that process.
In overall terms, after 18 months of audit involving much work not only by the ATO themselves but by me and my accountant (who has been very understanding and not charged me for much of his time) the ATO have recovered only around $100 of additional tax in total over the three years audited! You have to wonder whether it has been worth it, when less work investigating the larger end of town may well have netted a much bigger windfall - but that’s not the major issue I’m interested in here.
There are a couple of issues raised during the audit which I’m sure other contractors would be interested to learn concerning the interpretations made by the tax office. This is at odds with my own and my accountant’s interpretation – explaining his very understanding situation regarding his charges for the work involved on the audit.
Firstly, regarding the 80% / 20% rule. Both my wife and I worked through our company, and combined we managed to stay well within the 80 / 20 rule (I thought) by ensuring that for each year no more than 80% of our combined income was from any one single client. The ATO however have interpreted this rule on an individual by individual basis, not a whole of company basis. In other words they have insisted that both my wife and I must individually earn no more than 80% of our income from any one client – as if we were working totally independently, instead of through the same trading company as was the case. This took me completely by surprise, and I am sure would catch out many contractors who may be assuming that they are meeting this part of the PSI legislation by working in partnership with a spouse or other fellow contractors. Beware this one!
Secondly, for a few months one year I engaged a contractor to work through my company. This was done as a favour to a friend who had been offered a short term contract by a local company who were insisting that billing for the work be done through a company. Rather than incur the costs of setting up a company himself (he was only planning on contracting for a few months while he waited to take up a permanent position), I agreed to bill the company on his behalf. As part of the ATO’s audit they decided in their wisdom that the company’s costs should be apportioned to the contractor as well as my wife and I, even though he had no interest in the company and was not and never has been a shareholder. This meant that tax deductions claimed by me and my wife were reduced and allocated to the contractor. Again this struck me as very strange, but at the end of the day has not had a major impact on the tax bill in my case, but the situation could have been much worse had this arrangement continued for much longer. Beware this one too!
Posted by: diesel
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