For nearly ten years, since our inception, Entity Solutions has held the view that, for the overwhelming majority of Independent Professionals (IPros), there is no legal benefit in establishing a PTY LTD company, Trust or Partnership structure as a vehicle through which to contract.

In short, we can provide IPros with every legal benefit that they could receive from their own structure at a lower fee, with less liability, reduced administration and other benefits generally not otherwise accessible to IPros.

But this isn’t a sales pitch…

I wish to also add that we have always questioned the legitimacy of establishing these structures as they are generally established for the purposes of income splitting and other tax “avoidance” strategies. We have never, despite the demand, offered consulting or services aimed at achieving this end for our customers.

Simply, we believe it is a grey, if not illegal, approach which flies against one of our stated USP’s: ethical engagement.

This latest ATO court case ruling is the latest chapter in a story which continues to unfold as we have predicted.

I refer you to a summary published by the Independent Contractors of Australia (ICA):

(For full disclosure I am a Director of the ICA)

Second Test Case of PSI reconfirms law. Taneja v ATO
In February, the Administrative Appeals Tribunal handed down a decision covering Personal Services Income legislation. All independent contractors and the businesses that engage them need to be aware of the case. There are implications for income-splitting and tax deductions.

This is the second legal test case of the PSI rules of which ICA is aware. It follows the first test case decision of late 2007 and is consistent with the outcome of the first case. Both of these cases confirm the thrust of the major ATO ruling and the PSI legislation.

This case (Taneja v ATO) involves a contractor in the information technology sector working through his own proprietary (PTY) company. The first case (2007) involved two specialist consultants working in the mining sector, one working through a trust and the other through a PTY company.

In this second case, the IT worker did the work, invoiced and was paid through his company and he split his income with his spouse and contributed superannuation on behalf of his spouse. The tribunal has found that he failed the results test and that the income was entirely his personal income. The consequence is that he cannot pass income to his spouse or claim tax deductions for superannuation paid on behalf of his spouse.

ICA’s overview comment
There is a consistent pattern emerging in which independent contractors working through PTY companies or through trusts are failing to pass the PSI rules. This is not to suggest that the use of trusts or PTY companies is illegitimate or invalid for tax purposes. What is clear is that if trusts or PTY companies are to be used, enormous care needs to be taken to ensure that the specifics of the results test are fully implemented in the ongoing contractual arrangements. The ATO continues to audit and review trusts and PTY companies and will challenge arrangements where it believes the results test has not been applied. Note that the ATO has a totally different attitude to partnerships.

ICA members can access more details on the PSI issue and the first test case. There are significant implications for the IT sector and contractors in general arising from this case.

If you wish to discuss anything regarding this case or the issues surrounding it we encourage you to contact us and we will provide you with additional documentation and a complimentary education service.

Matthew Franceschini

CEO – Entity Solutions

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ATO putting contractors under the microscope, are you safe?

A little over a month ago I wrote here to highlight a recent test case of PSI legislation which substantiated our long held view that in the case of most contractors – whom we refer to as Independent Professionals (IPros)...

3 Comments for Latest PSI Result: Think twice about your company structure…

Matthew Franceschini

Dear Stan

Thanks for your question; it’s an extremely pertinent one.

Firstly, let me say that each individual’s circumstances are different and to gain a truly tailored response you should see a taxation professional or come and talk to us, outlining all of the relevant details.

In order to provide you with ‘absolute peace of mind’ you can also write to the ATO to receive a personal ruling that will be final and binding.

In general terms though it is important to understand that, despite being a ‘catch cry’ for many, “80/20” is just one test that is used by the ATO in assessing whether income is that of a Personal Services Business (PSB) or is, in fact, Personal Services Income (PSI).

In your example, I would suggest that both you and your wife are earning what would be deemed as PSI and after deducting the legitimate expenses of your company you would both be required to include this PSI as income on your personal tax returns in the proportion that you have earned it. So, for example, given your figures and if I could assume that the company had $10,000 in legitimate expenses, the company would make a profit of $90,000 for the period. It would then be required to distribute this profit to you ($27,000) and your wife ($63,000). Both of you would then be required to declare this income in your personal income tax returns.

I hope this helps and thanks for your question.