In our Startup Daily blog post this month, we look at Contractors and Tax and the application of the 80/20 rule.
When you make the big move to go out on your own, you will need to be aware of the tax issues that surround contractors as you could be taxed differently to how you thought you would be. So what are some of the big issues you should be aware of?
If 80% of your income comes from one client (including their related entities), you may find that you fall within the Tax Office’s Personal Services Income Provisions. Personal Services Income is where the majority of your income is earned by your personal effort or skill. As an example, think an IT contractor who mainly contracts to one client.
There are two main implications:
1. Regardless of what structure you operate under, if the Personal Services Income regime applies in your situation then there are certain tax deductions you are not able to claim. These include:
2. Under the Personal Services Income regime, it also means that all income received in your chosen business structure is attributable back to you personally. So, if you operate under a company structure, then all income has to be recorded in your own personal tax return. This means that any of the perceived tax advantages which are associated with creating a company structure are no longer relevant.