Taxation Changes and Implications for Contractors – No Room for Complacency – John Elliot

In my original message I wrote of taxation changes affecting contractors. Articles on these these changes have been given in publications of both the AusIMM and that Australian Institute of Geoscientists. Among contractors and consultants the widely accepted interpretation of the changes is that if you are a contractor operating within your private company and that company derives more than 80% of its income from one client, then all that income will be classed and assessed as your personal income. If not paid out by your company to you then various tax penalties are likely to result. I argued that instead of accepting these changes our professional bodies should adopt the view that the changes are totally unacceptable and lobby hard to have them abolished. I have seen no evidence of any concern that on the part of either the AusIMM or the AIG, or indeed our general membership, which suggests to me the general view is that the new rules probably only affect a hapless few and there are therefore more important matters to be concerned about.

Your complacency may therefore be about to be shaken!

A few weeks ago the National Tax & Accountants’ Association Ltd (NTAA) held a taxation seminar in Sydney. One of the matters discussed was contractors and personal services income (PSI) with particular reference to a recent Australian Tax Office (ATO) release TR 2001/D4 which gives a large number of hypothetical examples. Much of the material is, in my opinion, quite alarming. I do not propose to discuss the seminar presentation in any detail but will mention a couple of matters.

The definition of PSI has apparently not changed and is defined as “income that an individual taxpayer earns predominantly as a direct reward for hid or her personal efforts…”. However, the new ATO ruling contains a lot more detail and it may appear that the ATO have taken a tougher stance than in the past. It is the definition of PSI and whether or not earnings are classed as PSI that appears to be most critical hurdle.

With regard to the often quoted 80/20 rule, the NTAA state: “The 80/20 rule is specifically designed to determine whether an entity can self-assess whether the PSI measures apply, or whether they must obtain a Personal Services Business (PSB) determination”. The NTAA explicitly states that it is “..a popular and dangerous myth” to think that the PSI measures are avoided by not breaching the 80/20 rule.

There are numerous hypothetical examples given by the NTAA and it is important to note that these are taken from the ATO paper. I shall only quote one: “Robyn is a radiologist who has x-ray machines and other equipment worth $1,200,000 that she uses in her sole practice. Robyn is the only one who is qualified to analyse and report on the results that are produced from the machinery and equipment that she uses. Robyn’s income from her practice will be PSI as defined in S.84-5(1). Her income is mainly a reward for her skills in interpreting the images that are produced by the machines that she uses.”

I don’t know any geological consultants who have equipment worth $1.2M. We can also expect changes to allowable expense deductions and in particular to superannuation deductions. What do you think now about the matter of lobbying the government? Still feeling complacent and relaxed?

Have a good weekend! Regards to all,

John Elliot

Anzeco Pty. Limited

Mineral Exploration Consulting Services

26 Casey Circuit

Bathurst, NSW 2795, Australia

Tel +61 2 6331 4925

fax +61 2 6331 9111


Disclaimer: The author is not a tax advisor or accountant and nothing here should be taken as advice on any matter whatsoever. You should seek advice from your own financial advisor or advisors.