Saving Tax Working as IT Contractor and Setting up PTY Limited Company PSI PSB Rules

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  AndyC1 on 08/04/2022 - 16:22

  2.5% of your time at work = $A
  How many hours for the year will you spend looking after the company = H . Times this by your contracting rate = $B + overheads as mentioned in your post = $C

  If $A < $C then you save money by letting the agency do the work.
  If $A > $C then you save money by doing it yourself.

  Ask your friends who are contracting what deductions and how they structure things to legally minimize taxes paid as it can be done and this is why people hire accountants, which you seem to have missed as you have just looked at the company costs and have not said about the benefits.

  • 

    vestigialsideband on 08/04/2022 - 16:52

    hello
    thanks for the sane advice. In this case
    $A < $C by around 500-600$
    so I guess it's not worth the time and effort, I may let the agency do the work
    Do you know any good accountant I can speak with to legally minimize the cost? I qualify as PSI/PSB so not sure if I will have any benefits.
    Thanks

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  Seraphin7 on 08/04/2022 - 16:22

  +1

  1. Yes.
  2. Yes.
  3. There a variety of reasons to consider doing this, but there are very limited tax benefits in the specific scenario you describe.
  4. No.

  If the contracting mob are adamant there is no way around the 2.5%, you need to consider what the cost of this is vs. the cost of running a Pty company. Depending on a range of factors, accounting and compliance costs can range from ~$1.5k to ~$3k p.a.

  • 

    vestigialsideband on 08/04/2022 - 16:54

    Thanks for replying.
    point 4- can you please let me know why I am not taxed double? Because as I understand company income is taxed at 30%, and any personal income I draw is also taxed(either at 30% or 45%) as it is personal income. I my understanding incorrect?
    Will appreciate your reply.
    Thanks

    • 

      Seraphin7 on 08/04/2022 - 16:58

      +3

      You company profit is taxed at 30% (I think it's actually 27.5% now, but that's not directly relevant here) … the income you pay yourself as a salary is an expense to the business such that it nominally takes all the revenue and therefore makes zero profit each year.

      • 

        vestigialsideband on 09/04/2022 - 09:43

        Thanks I understand it now

    • 

      AndyC1 on 08/04/2022 - 20:29

      +1

      People hire accountants to answer these type of questions.

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  ALesha77 on 08/04/2022 - 17:06

  I remember myself doing this research many years back. Sadly did not get a good advice back then at my very step. So, here it is.

  PAYG through an agency at 2.5% is a commonplace but it is a robbery and they will be willing to waive it if you are good at what you do (and they are getting slice of your daily rate as well). I was able to negotiate it (waive the fee) a few times with different agencies. But you might be not at that stage yet so read on.

  If you don't have another business or family members to hire or other shady schemes in mind then forget about your own company - too much money and too much time required. Also, even a good accountant would not be able to remove most of headaches and pitfalls as they would assume that "you should have known". And, yes, since you will be getting more than 90% of your income from 1 entity, you are considered to be an employee in ATO eyes.

  The last sensible option on the list is to do your business through a payroll / umbrella company and there are plenty of those - just google it. Their rates would be slightly lower than the agency but they would be much more caring and attentive to your need plus there could be tax deduction options that you would not get through an agency .
  For a long time I have been with Achievecorp - only the best experience. The cheapest option to go with them would be at 1.25% which is half of what your agency wants and the cheapest option around. PM me if you need an introduction (I will not get anything from those guys, this is not a referral or anything of that kind). Or google their web-site (not posting a direct link as it might be misunderstood by Admin)

  Hope this helps

  • 

    vestigialsideband on 09/04/2022 - 09:45

    thanks a lot for replying, yes this helps. I am not sure if recruiter will allow me to switch the payroll agency quickly , I will check with them and then will message you. Thanks

    • 

      ALesha77 on 11/04/2022 - 13:40

      You can just let them know that you switch to another ABN / company and they will HAVE to comply. Obviously, there is a part of personal relationship that I might not know about but they can't just say No unless it is contractually fixed.

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  Quantumcat on 08/04/2022 - 17:23

  -3

  If you have a spouse or adult child living at home who isn't working, you can pay them from the company up to the tax free threshold and save that much worth of tax. Unless they have a good reason not to be working though the family would end up with less money overall by doing this vs just working their own job.

  • 

    freefall101 on 08/04/2022 - 18:05

    There's all sorts of rules for paying family members a salary from a company, you can't just pick a dollar amount out of the air and give it to them.

    • 

      Quantumcat on 08/04/2022 - 19:01

      Whatever the rules are, simple enough just to follow them 🤷‍♀️

  • 

    Donaldhump on 08/04/2022 - 18:48

    yes and then you can bend over when the ATO visits you

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  Donaldhump on 08/04/2022 - 18:45

  +1

  1- With PSI/PSB rules, since I am working only for 1 customer, even if I set up a PTY limited company I will still be taxed as an individual. Yes as you need to pay out all the company income to the sole company employee, i.e. you.

  2 - Even for PTY limited companies - the money is the company's money and not your personal income, you can draw a salary and get dividends as 100% shareholder of the company, but any income you receive will count as personal income and you have to pay tax on it.

  PSI will deem this as your income i.e. personal so all would have to paid out and you are no better off

  3 - If the answer to 2 is yes, then why would one set up a PTY limited company if it doesn't help in saving taxes? because people try to evade tax if PSI applies, and if PSI does not apply they can leave money in company, shadly pay their non working spouse a salary

  4 - You will get taxed double - 30% on company income, and 30-45% on the personal income and dividends you draw from the company. Yes/No :

  your company would pay it all out hence no profit, else if its a legit non PSI PTY the company pays 30% but believe if it is then payed out later there must be some return to the company. not sure with this one.

  do yourself a favour and pay the 2.5% which is really 1.6% or so as pre tax, you would be an employee of the recruitment company and thus they would have insurance to cover you, another thing you don't have to buy… or go via another payroll company, have the recruiter adjust the contract so their client is the payroll company and not you, they can't force you to go through them.

  here is a good alternative
  https://www.oncoreservices.com/au/

  • 

    vestigialsideband on 09/04/2022 - 09:45

    Thanks for the reply mate, appreciate it

  • 

    mini2 on 13/04/2022 - 08:32

    3 - If the answer to 2 is yes, then why would one set up a PTY limited company if it doesn't help in saving taxes? because people try to evade tax if PSI applies, and if PSI does not apply they can leave money in company, shadly pay their non working spouse a salary

    There's nothing wrong with paying spouse/in-laws/your own parents if they haven't used their tax-free threshold and won't affect their pensions/DSP etc.

    There's a fine line between tax avoidance and evasion. I subscribe to Kerry Packer's approach to tax:
    https://www.smh.com.au/business/kerry-packers-approach-to-ta…

    • 

      Donaldhump on 13/04/2022 - 09:16

      if you fall under PSI you can't pay your spouse hence the P. You certainly can do so, but if you get caught you will be penalized.

      the income is not generated by a business, but by personal services.

      Kerry Packer ran a business, this OP is a one client IT contractor.

      businesses = multiple clients with no recurring work neccessary, not consistent work (dentist, doctor, tax agent)
      psi = OP = one client with recurring work, recurring income >80% from one client, disguised employment.

      solution get 2 it contracts 3 and 2 days a week, problem finding this.

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  Master Bates on 08/04/2022 - 19:26

  Family Trust and stick to 80/20 rule seems to be a tax minimisation strategy used by some. I don’t know what it means, but Google may help you.

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  mini2 on 13/04/2022 - 08:30

  Company setup cost - $512 + $34 through ecompanies.com.au
  PL/PI are bundled - expect ~$1k a year depending on fees collected
  Workers comp - expect $6-800 a year depending on state/fees collected
  ASIC annual review fee - $8x, can't remember the exact amount as it was insignificant

  • your accountant's fees or your time doing BAS/PAYG/SG
  • 

    bemybubble on 14/04/2022 - 14:51

    ASIC annual review fee - $8x, can't remember the exact amount as it was insignificant

    Currently at $276 so not sure what you're on about here…

    • 

      mini2 on 28/06/2022 - 13:05

      I did say I can't remember the exact amount as it was insignificant.

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  Vishc90 on 23/06/2022 - 09:52

  +4

  This community has helped me over the years. So, I thought I should add my two cents. I'm a tax agent specialising in PSI/PSB rules. I have clients who work using a corporate structure. I'd recommend setting up a discretionary trust with a corporate trustee (pty ltd). Generally, the tax savings from that structure is most likely to outweigh the costs. If you are interested in researching, have a look at sub division 86-B of ITAA 1997. Also, read TR 2002/D5 in which the ATO has expressed their views. The examples on this ruling should give you an idea.

  Again on a general level, the tax savings are achieved through concessional FBT treatment of certain expenses.

  In short, you'll need to find an accountant who is well versed in personal service entities and fringe benefits tax.

  If you need anything specific based on your circumstances feel free to ping me.

  Also, when you pay an accountant they should take care of all your tax and accounting needs, you shouldn't have to spend your time running it.

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  Planterina on 13/07/2022 - 10:26

  @vestigialsideband - Hello mate, how did you go with your decision? I am planning to do the same in the next few months and have started my research. Would highly appreciate your views on this. Cheers!

  • 

    vestigialsideband on 14/07/2022 - 19:44

    I ended up working on TFN as suggested by everyone, if you are working for only 1 client the. PSI rules kick in and you don't save anything extra but spend more money on running cost of company. But your mielage may vary, do your own research

    • 

      Planterina on 15/07/2022 - 11:15

      Thank you for letting me know. That does make sense. All the best!