The 80 20 rule is something that we often get asked about by contractors and business owners? So what is it and where will you see it in business?
The 80 20 rule is one of several tests that fall under the ATO’s Personal Services Income provisions relating to income received by consultants and contractors. Personal Services Income is where the majority of the income is generated for the skills, knowledge, expertise or efforts of the person who performed the service.
Irrespective of what structure you operate under, if Personal Services Income applies in your situation, your deductions will be limited and income generated by you will be attributable solely to you, not your business. This means any perceived tax advantages associated with creating a corporate structure may be redundant under these rules.
So where does the 80 20 rule come into play? One of the ways in which the ATO determines whether you fall under the Personal Services Income rules is by looking at several tests. The 80 20 rule is one of these tests that looks at whether 80% or more of your income comes from one source (including related parties). If it does, then the Personal Services Income rules will apply which will require additional considerations when doing completing your Income Tax Return. If it doesn’t, than the Personal services Income rules will not apply and income will be considered business income.
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