Why The ATO May Think You Are Not In Business

Written on the 4 September 2014

There are some businesses that the ATO do not really think should be taxed like a businesses.  Unfortunately, just having a company or other structure set up does not protect you.

If you earn income mostly from your own personal skill or effort, like many contractors – then you are in danger of the ATO preventing you from accessing the 30% company tax rate and deducting some business expenses.

So, how do you know if you are caught? If you are the person responsible for the income produced by your business, and it’s from your personal efforts – not the use of machinery or trucks, the sale of goods, etc., - then you might be earning personal services income (PSI). The ATO then applies a series of tests to work out if you should be taxed like a business or more like an employee – like whether you work to achieve a specific result or are paid an hourly rate, whether you have multiple clients or just one, if you have an apprentice, where you operate from, etc.

If you earn PSI and you pass all the tests to be taxed like a business, there are still a few catches.  For example, the ATO believes that when PSI is derived through a company or a trust, all of this income should generally be paid to the individual who performs the services as salary or as a distribution of profits.