There are special tax rules for contractors to ensure they do not use business structures to avoid income tax obligations. Many consultants and contractors operate through a company, partnership or trust. In many cases, the income received for the work they do may be classified as personal services income (PSI). If the income earned in a contract is more than 50% for your effort or skill it may be classified as PSI. PSI rules affect the amounts you include as income and deductions in your tax return and therefore your TAX PAYABLE!

‘’Jim is an engineer and the sole shareholder/director as well as an employee of his company Jim Coy.  Jim Coy has a contract with a engineering company – Client Coy. Under the contract, Jim provides consulting service to Client Coy from 1 July 2014 to 30 June 2015 for $480,000. The services provided are predominantly for the labour and effort of Jim. 

 From the $480,000 revenue Jim Coy has paid salaries to Jim, other salaries and expense like a business does and in the process reduced its taxable income from these deductions.

 As the $480k is Jims labour the entire $480,000 will be taxed entirely to Jim as if Jim was an employee! Many of the deductions the business has claimed will be disallowed and TAX PAYABLE will increase!

 The Tax Office is getting stricter on the Personal Services Income Rules as demonstrated in the recent tax determination (TD 2014/D15). If this may apply to you please talk to us before it becomes a problem.

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