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Contractors and Consultants

In recent years there has been an increasing tendency for individuals to set themselves up as 'contractors or consultants' and provide services which, by most measures, are identical to those provided by employees. These people may operate either as individuals or through a partnership, trust or company structure. For taxation purposes, these people have made claims for a variety of expenditures that employees would not ordinarily be able to claim. This type of arrangement has created an inequity between those who call themselves contractors/consultants and employees, in terms of what each has been able to claim for income tax purposes.

To address this, the Government has introduced legislation that has the effect of restricting deductions available to 'contractors/consultants' which, based on four tests, conclude that an individual is alienating his/her income in an effort to gain deductions that would not otherwise be available to that person if he/she was an employee. An excerpt from the ATO's website highlights the impact on deductions where the changes to personal services income impact you.

Deduction

Can I claim it if the changes apply to me?

Can I claim it if the changes don't apply to me?

Premiums for workers compensation, public liability and professional indemnity insurance

Yes

Yes

Bank and other account-keeping fees and charges

Yes

Yes

Tax-related expenses, such as the cost of preparing and lodging tax returns or BAS forms

Yes

Yes

Registration or licensing fees

Yes

Yes

Expenses for advertising, tendering and quoting for work

Yes

Yes

Depreciation

Yes

Yes

Running expenses for your home office (not including rent, mortgage interest, rates or land taxes, see below)

Yes

Yes

Rent, mortgage interest, rates or land tax for your home that is a place of business

No

Yes

If you are a personal services entity, expenses or FBT for more than one car that is used partly or solely for private purposes

No

Yes

Salary and wages for an arm's length employee (not an associate)

Yes

Yes

Salary and wages paid to the principal worker within 14 days of the end of each PAYG withholding payment period

Yes

Yes

Contributions to a super fund on behalf of the principal worker or an arm's length employee (not an associate)

Yes

Yes

Reasonable amounts paid to an associate for principal work

Yes

Yes

Contributions up to the super guarantee amount for an associate doing up to, but less than, 20% of the principal work

Yes

Yes

Reasonable amounts paid to an associate for non-principal work

No

Yes

Reasonable contributions to a super fund for an associate doing solely non-principal work

No

Yes

If you are unsure whether these changes affect you, contact Phase III and we can help you assess your position or, if required, apply for a determination (required in certain circumstances - such as where 80% or more of your income for the year comes from one customer) from the ATO.

Failed to lodge your BAS or IAS?

In an address to the Institute of Chartered Accountants in Sydney on Friday, 3 May the Commissioner announced that anyone with two or more overdue Business Activity Statements or Instalment Activity Statements has until 31 May 2002 to lodge them or face penalties. This applies to clients who lodge monthly or quarterly.

The Commissioner said that this approach is being taken in fairness to the majority of people who have been lodging and paying on time.

From 1 July 2002 late lodgement penalties will apply more broadly, from the first Activity Statements due for the new financial year.

Any document that is not lodged on time may have a penalty notice issued automatically. This penalty is referred to as the Failure to Lodge on Time (FTL) penalty.

The FTL penalty is calculated as follows:

Small entities are liable to a penalty of $110 for every 28 days, or part thereof, that lodgement is overdue.

Medium entities are liable to a penalty of $220 for every 28 days, or part thereof, that lodgement is overdue.

Large entities are liable to a penalty of $550 for every 28 days, or part thereof, that lodgement is overdue.

The maximum penalty that can be imposed is for 5 periods.

Entity size is determined by reference to its withholding status, its assessable income or its current annual turnover for GST purposes.

(ex the ATO's bulletins 18/2/2002 and 8/5/2002)

Are you affected by the 'non-commercial' legislation?

Until recently it has been common practice for a number of people to be employed in a regular job and conduct some form of part-time 'business' after hours or on weekends. In a number of instances, these people have incurred tax losses from these business operations which they have used to offset against assessable income from their regular employment. The changes introduce four tests of which at least one must be passed before the losses can now be deducted..

You can offset a loss from a business activity against other income if the activity passes at least one of four tests. It may:

  • have an assessable income from the activity of at least $20 000, or
  • have produced a profit in three out of the past five years, or
  • use real property or an interest in real property worth at least $500 000, on a continuing basis, or
  • use other assets worth at least $100 000, on a continuing basis.

If an activity does not pass any of these tests, you may still claim a loss if the Commissioner exercises a discretion.

These measures do not affect your ability to claim a loss from an investment activity (i.e. a rental property negatively geared) against your other assessable income.

Superannuation rises to 9% from July 1,2002

 In July 1992 the government introduced a requirement for employers to provide a minimum level of superannuation support for employees, to be paid into an approved superannuation fund. The rate started at 3% and has risen since then to its current rate in the 2001-02 of 8%. 

From July 1, 2002 the rate rises to 9%

Superannuation support you provide for your employees will usually be
tax deductible up to certain limits. If you fail to provide the support, you will incur a superannuation charge, plus interest and an administration fee. This charge is NOT DEDUCTIBLE - so ideally pay the superannuation and obtain the benefit of the deduction.

While it would be expected that you would pay the superannuation levy progressively throughout the year, you do have 28 days after year-end to make the payment and avoid the penalty. If you do, you will not be able to claim the tax deduction for the year to which the superannuation relates, but rather the year in which you pay it.

There are some exemptions from the levy, such as where the wages are less than $450 per month or the employee is under 18 and works for less than 30 hours per week. For a full list of exemptions, or other questions, contact Phase III.

 



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