Tax Question - Is This Legal?

sierrac on 04/02/2015 - 15:50

Okay, so I've done a little bit of reading and think that I'm in the clear, but I'm young and dumb and would really appreciate if somebody else could read over this and make sure I'm not doing anything that will get me in trouble.

I'm a full time uni student, and I work in a retail job on the weekend.

In my free time, I've begun doing some article writing and publishing various things online. I've gone okay, and will probably make around $24,000 from that this financial year.

With my retail job, it will probably equate to a total yearly income of $30,000 - enough that I'll have to pay tax.

Except that I think I've come up with a way that I won't have to pay any tax. Here it is:

  • the money I earn for my writing is paid each month into my Payoneer account, which is a virtual US bank account (it's a bit like Paypal). From there, I transfer it into my personal Australian bank account.

  • my sister just finished high school and is unemployed and not looking for a job.

I'm thinking I could pay some of the money from the Payoneer account into my sister's bank account, basically treating her as an employee. Like she's helping me out with my eBooks or covers or editing or whatever, and I'm giving her a small salary. This means that we will both be under our tax thresholds of $18,000, and I will not have to pay any income tax.

Is it ok for me to have an 'employee' even though I'm not registered as a business? (I don't need to register as my earnings are too low).

From there, she can gift me the money… I believe that gifts from family members are tax free?

So does this all sound okay and legal? I trust her completely, there's no chance of her trying to keep the money. And neither of us get Centrelink or any sort of government benefits.

Financial

Comments

  • [Deactivated] on 04/02/2015 - 15:51
    +10

    If you have to ask then its not legal.

  • brazen00 on 04/02/2015 - 15:53
    +9

    Sounds like tax avoidance to me.

  • ethereal88 on 04/02/2015 - 16:03
    +3

    If the ATO randomly audited you you would be stuffed. It is trivial for them to find out any accounts you have (and family members) along with any money transfers. Then you would have the IRS after you as Payoneer is headquartered in the US and you probably have to declare tax:

    https://payoneer.custhelp.com/app/answers/detail/a_id/6105/~…

    Your sister's bank may also get suspicious with continued transfers from overseas.

    And $24K from online writing seems rather suss, you don't get much from articles along with full time university and a retail job taking up your time.

    By all means though, go ahead and see what happens!

    • sierrac on 04/02/2015 - 17:03

      I'm not worried about the IRS, they're already getting their 5% withholding tax.

      I suppose it does seem a bit suss, but I'm not lying about where the money's from. I work very hard.

      Thank you for your reply!

  • retiredfeline on 04/02/2015 - 16:21
    +6

    Foreign income is taxable because you are a resident for tax purposes. Since you don't have a company and employees, the income is yours. Ergo, you are liable for tax on the income.

    Just to clarify, the illegal part is claiming/pretending you don't have income because you gave it away. It doesn't matter if you gift it, gamble it away or what, it's still assessable income. If however you genuinely employed your sister with all the attendant paperwork, etc. then it would no longer be your income but an expense. ATO doesn't check whether your sister worked her a** off or did zip for you, that's an employer/employee matter.

  • Smulder on 04/02/2015 - 16:23
    +6

    It does not matter how your income is paid (ie cash, bank account, Payoneer, Eneloops), all that matters is that you have earned the income, and thus it is taxable.

    As you did the work while in Australia, the ATO would consider it Australian taxable income.

    Google 'Personal Services Income'. Even if you did have an ABN and a business, the ATO would consider all the income to be yours as it is a result of your personal services, no matter if you 'employed' a relative.

    Basically, not any part of your scheme results in you legally avoiding tax.

    Of course the Australian Taxation System is a self-assessing system.

    Your only potentially successful argument would be if you were treating the writing as a hobby. Income from a hobby is not taxable and not included in the tax return. Certainly the ATO would not consider you a business if you were trying to claim a tax loss. But that line of argument is unlikely to be successful if you were ever audited… it might get your fines reduced though.

    If you do end up including it in your tax return as taxable income, make sure you claim a deduction for your computer depreciation, internet use, phone line etc etc.

    And well done earning $24k from writing!!

    • sierrac on 04/02/2015 - 17:09
      +1

      This is exactly what I needed to know. Thank you very much for your help (even though the answer isn't what I was hoping it would be). I really appreciate it.

      I will be including it in my tax return. I don't want to do anything that could come back to bite me in the ass later on.

      Since you seem fairly knowledgeable about this, I have another question I was hoping you'd know the answer to: if I were to leave Australia, and travel around Europe and Asia for an entire financial year, supporting myself with my writing, would I still need to pay Australian taxes for the writing money earned in that year? Even though I wouldn't have set foot in Australia the whole time?

      • retiredfeline on 04/02/2015 - 17:31
        +1

        Look up residency for tax purposes, it's not exactly the same as living in a place or not.

      • Smulder on 04/02/2015 - 17:43

        If you remain an Australian resident for tax purposes (which is likely if you are planning to return to Australia) then you are taxed on your worldwide income. This includes foreign employment income.

        However, most foreign countries would want you to pay tax on income earned while you were in their country too, so generally you would get a credit for that foreign tax paid when you lodge your Australian tax return so that you aren't double taxed on the same income twice.

        That's the law anyway… would you be the most honest person in Australia if you declared all your foreign working income in your Australian tax return though? … Probably.

        • sierrac on 04/02/2015 - 18:25

          Thank you!

      • srhardy on 05/02/2015 - 07:41

        A hobby can make you money but not be deemed as income FYI and i know of rulings of more than 20k from a hobby (junk collecting on recycle council days)

        If you have 'paperwork' ie, contract with your sister then it might pass muster. Be aware she needs to do her own super/tax & it still needs declaring

      • crupatutc on 05/02/2015 - 10:08

        If you're not in Oz for more than 180days (183?) and you can prove that you have a significant amount of your life overseas (club memberships, bank accounts, residence(s), job/work/employment agreements/contracts) proven, [ which also means you don't have the same in Oz] then you're likely
        not to be considered tax resident here.

        Re: other countries - in general, the same 180 days in a year rule applies. If you stay longer in
        any place, you're automatically deemed a tax resident, whether you're a long-term residence visa holder or a citizen or a permanent resident. In Shengen/EUzone area you'd have to move every 90 days between countries for non-tax reasons anyway, unless you obtain long term resi visa. Don't know what happens in Asia.

        So - if you want to consider accommodating Permanent Tourist lifestyle and avoid Oz tax, then yes, it can be done, lots of people do it legally.
        Suggest talking to accountant (and I'd speak to a few) here and also dig through expat forums (there are a plenty) and see what happens there.

  • Heizenberg on 04/02/2015 - 16:26

    I'm no expert but that sounds pretty dodgy

    • cloudy on 05/02/2015 - 22:41
      +1

      To keep my answer short.
      I am an expert, and there are lots of issues with this scheme.

  • humdogg on 04/02/2015 - 16:26
    +2

    the answer to your main question is plain. It is plainly illegal for your to distribute your income to your sister claiming it is a wage, when in reality she does not work for you and further, she is returning the money to you.

    Whether you get caught is another question. You might not get caught. In short, you could probably find a legal way to distribute income to your unemployed sister to take advantage of her tax free threshold. I could tell you for the reasonable price of $24,000. You could write it off as a business expense though.=)

  • mskeggs on 04/02/2015 - 16:31
    +5

    The first three comments are incorrect. Such an arrangement would be legal if you genuinely employ her to assist you.
    You can pay her $15k p.a. to make you coffee, as far as the government is concerned.
    You must, however, keep suitable paperwork. You will be operating as a sole trader (assuming you don't incorporate) and will have a number of obligations e.g. you would need to pay superannuation to your sister's fund, would have to collect tax if she ever earned more than $357 a week, you would need worker's comp insurance etc.

    Because the paperwork of employing people is significant, it probably isn't worth the hassle in this case.
    On $30k the max tax you will pay is $2242. I would think it likely you could claim deductions such as computer equipment, internet access etc. to reduce that.

    TL:DR - you can do it, but you have to do it legit, which probably makes it pointless

    • Smulder on 04/02/2015 - 16:43
      +3

      They may be caught by the PSI rules, meaning even if she did do it legitimately, the deduction may still be denied. It would depend on the circumstances of the writing 'business', whether she passed the results test, or if not, one of the PSB tests.

    • horsome on 04/02/2015 - 22:34
      -2

      No, no, no! You are talking of setting up a scheme to avoid tax. Horrible advice. Yes we are talking small sums here, and as far as the op is concerned I'd be amazed he was on the ATO radar, but your principle is all wrong.

      There's effective tax strategy, then there's blatant tax avoidance.

  • ahly92 on 04/02/2015 - 16:45
    +1

    How about you try and lower your taxable income..

    For ur writing job.

    • Include any electronic items you bought this year that may be related to writing (Ipads, computer, printer etc…)
    • If u have electronics that u bought from previus years and have a receipt then u can depreciate the asset
    • Personal education Cost (not sure if u need proof)
    • You can prob inc some of the electricity expenses if ur living alone
      https://www.ato.gov.au/Individuals/Income-and-deductions/Ded…

    So just fish around and see what deductions u r entitled too.

    NOTE:
    It would be helpful if u download the e-tax application on ur computer and go through the tax lodging process without submiting it to see what and how much u can reduce ur tax

    • sierrac on 04/02/2015 - 17:17
      +1

      I will definitely look into any deductions I can make.

      Particularly interesting to me is Personal Education Cost… I've never heard of that before, and am curious as to whether I could claim the expense of some of my university units. I'm definitely doing some that could be seen as relevant to selling my writing and having a small 'business' (accounting, commercial law, marketing) etc. i'll definitely look into this more.

      Thank you so much for your suggestions!

      • sickllama on 05/02/2015 - 22:25

        Were you making money from writing prior to starting your uni degree? If so and your degree will help you make more money then its deductible. Help loans aren't deductible under any circumstances through.

  • Almost Banned on 04/02/2015 - 17:31
    +2

    IMHO as soon as the payment is applied for your benefit (ie paid into any account you direct it be paid into) it is assessable income in your hands.
    Surely the better way is for 'your sister' to submit the articles and have the money paid to her - thereby making use of her tax free threshold.
    Once you get to the threshold for her perhaps you have another 'sister' who could take up writing…???

    • Smulder on 04/02/2015 - 17:49
      +1

      That could be a clever solution, although I would think success in the writing field would rely a fair amount on name recognition, which would be lost if the article authors weren't consistent.

      • Almost Banned on 04/02/2015 - 18:41

        Come on Smulder - we are trying to be 'creative' types here.
        Yes, you may be right - I just saw it as some random freelance stuff, not as stuff where you have a personal following.

        • Smulder on 05/02/2015 - 11:51

          Yeah fair enough, though from her prior posts it seems she is selling ebooks on Amazon, which is why I mentioned it :)

  • [Deactivated] on 05/02/2015 - 07:17

    Almost Money Laundering. This Reminds me of the unrelated aunt in the UK with Swiss bank account in the Wolf of Wall Street

  • maxsdadda on 05/02/2015 - 08:06
    +1

    I'm pretty sure if you're doing things, not doing things, buying things or anything with the INTENTION of tax avoidance, you're breaking the law. SORRY TO BURST YOUR BUBBLE.
    I recommend seeing a Proper accountant for advice as I'm sure your deductions would be plentiful

  • Charlatan on 05/02/2015 - 08:09
    +1

    OP, income tax exists for a reason, just pay it.

    Also bloody good effort making $24k off of a writing job. If it's easy hours you could stand to be making a pretty penny on a yearly basis.

    …and subsequently paying your taxes on aforementioned pretty penny.

  • thefreelunch on 05/02/2015 - 08:34
    +1

    Keep in mind the income averaging avenue given you are working in a creative field (writing). It may not help this year but would in future years, particularly if your income keeps going up: https://www.ato.gov.au/Individuals/Tax-return/2014/In-detail…

  • SlickMick on 05/02/2015 - 12:11
    +1

    To employ your sister you'd also have to pay her super.
    It sounds like what you really want is a family trust which distributes to your sister up to her tax free threshold then rest to yourself. That is legit and tax office is fine with it, but I'll bet the costs of setting it up and running it is more than the tax advantages.

  • leiiv on 07/02/2015 - 02:21

    Why don't you just set it up so that all the writing income goes to your sister account, for a reason not because she is your employee but because she cough 'supposedly' is the writer. You know the stories where students pay other people to do their assignments right..
    And it just happen that your sister is so kind to give you her ATM card of that account..
    Your sister is unemployed and does not receive any centrelink benefits. Instead of paying the tax to ATO, why not instead give the equal amount to your sister?? Apart from the legality, it just seems the right thing to do.

  • [Deactivated] on 09/02/2015 - 10:02

    I got tax-related question, apologies if this is a wrong forum.

    If buying expensive headphone with ANC ($300 or more), that will be used for working, will this be tax deductible?

    • Smulder on 09/02/2015 - 11:26

      The headphones will be deductible for tax, however you will need to depreciate them over their effective life (ie claiming a portion of their cost each year).

      You cannot claim an immediate 100% deduction for an asset costing more than $300.

      • [Deactivated] on 09/02/2015 - 11:31

        Thank you Sir,

        Then I suppose I'll search for something less than $300.

        :)

        • Smulder on 09/02/2015 - 13:25

          You will have to live with the headphones long after your deduction is claimed… make sure they are still ones you are happy with :)

  • ttrinh on 17/03/2015 - 20:00

    Hi Sierrac. I know you wrote this post to ask a question (which I'm hoping you've found the answer to already), but I'm hoping you would actually be able to answer a few questions of mine. I've recently graduated from uni, and have decided to be a writer, and would love to eventually publish an eBook on Amazon. I'm really inspired by the fact that you've done rather well for yourself with self-publishing - even as a uni student! Congrats on your hard work btw! I know there's quite a bit of information already out there about self-publishing, but I was wondering if you could shed a little light about how to start, what tips you've found useful, insight knowledge about pricing - or even if you could direct me to some usual resources that helped you with the process. I've found starting something that's not so traditional is rather daunting, but I'm planning to try my best. If you could answer some of these questions - that would be so helpful and very much appreciated!

  • stephen051 on 02/01/2016 - 22:15

    You can do this legally by setting up a discretionary trust. Cost about $130 to set-up you apply for its own tfn from the ato and it itself actually has no tax liability as far as the payoneer income is concerned unless there is gst involved.

    From payoneer you distribute income to your trust fund and then nominate how much of that income you want to go between you and your sister by automatic funds transfer. The trust will have its own separate "Holding" band account.

    Your sister pays no tax on her portion as its under 18K and you too and your sister uses it to pay for both of your general expenses.

    Thats a legal way to do it.

    Both of you will still need to lodge a tax return showing your income from the trust each fy

    any questions email [email protected]

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