Do you run a contracting business through a company or trust?

Do you intend to split income with a spouse or pay your spouse for bookkeeping and administration?

If so, you need to be aware of the ATO’s personal services business rules that prevent income splitting and payments to spouses and ‘associates’ if you don’t meet certain rules.

What The ATO Rules Are

The rules state that if

  1. you or your company or trust do not satisfy the ‘results test’; and
  2. you or your company or trust received 80% or more of the personal services income from one source.

you will be subject to what the ATO call ‘the alienation measures’, unless you have a Personal Services Business Determination.

The Results Test

You satisfy the results test if

  • You work to produce a result(s); and
  • You provide the tools and equipment necessary (if any) to produce the result(s); and
  • You are liable for the cost of rectifying any defective work.

The 80% of Income Rules

The 80% of income rules have further details relating to where your business premises are and whether you have unrelated clients and whether you make ‘offers to the public at large’.

What the Rules Generally Cover

If you do contracting work for one client and effectively act like an employee, but contract your services through a company or trust, you will come under the rules.

Impacts of the Rules

The effects of the ‘alienation measures’ are

  1. the personal services income is included in your assessable income.
  2. You can not claim certain deductions, such as rent, mortgage interest payments and payments to your spouse (or any other associate) when the payment relates to non-principal work, such as bookkeeping.

Further ATO Rules on Income Splitting

If you pass the results test and receive work from different sources, you may not be able to split income with your spouse, due to the ATO’s general anti-avoidance provisions under what the ATO calls ‘Part IVa’ of the tax act.

This states that any arrangement entered into for the sole purpose of avoiding tax will be captured under Part IVa. The ATO will view income splitting from a personal services business as coming under Part IVa and will disallow it.

What to do next

If you are a contractor, you need to understand where you sit in relation to the rules and ask;

Do you pass the results test?

Do you obtain more than 80% of income from one client?

Once you have evaluated this, you will know what you can claim in relation to your work.

You also need to realise that income splitting will not be allowed for a personal services business. You may be able to pay your spouse for administration and bookkeeping but it must be at market rates. You should seek professional advice if you are intending to do this, to ensure this is within the ATO rules.

Further Questions

If you have any queries about your tax status, you can book a free, 15 minute consultation at http://bit.ly/2McjRct