Personal services income tax is a very tricky area of Australian tax law. It applies mainly to consultants and contractors.
If you qualify as personal services income, then you are eligible for taking standard business deductions on your taxes. However, harsh applications of this law established in 2000 have sometimes resulted in legitimate consultants and contractors being denied these deductions. That means they had to pay the maximum tax, and sometimes this included additional penalties based on anti-avoidance rules.
The bottom line is that determining your status for personal services income carries with it harsh consequences. There are certain tests that are applied in order to determine if you qualify. If you meet the qualifications of the test, then you can end up taking business deductions on your taxes.
However, if you claimed deductions and the ATO later determines they were made incorrectly, you can end up paying heavy fines. That is why it is very important to include the services of an accountant when determining your status for personal services income tax.
There are 3 methods for determining if your business activity qualifies as personal services income.
To determine your qualification for personal services income deductions, there is something known as the “results test.” This is the first test. If you meet it, then none of the other tests are necessary.
Specifically, there are three main conditions that must be satisfied in order to pass the results test and qualify for personal services income. You must first work to produce a specific result. You must also provide the tools and equipment needed for the job, if any. Additionally, you must also be liable for correcting any defective work that guarantees the result. These three conditions are not set in stone, and it is best to consult your accountant instead of determining this on your own.
These are the three conditions the ATO insists must be satisfied in order to qualify for alienation of personal services income via the results test.
Other tests exist to determine if your business qualifies. The rules for these tests can be quite complex. If you are unsure, one of your best choices is to apply to the Australian Tax Office for a determination. This area of tax law can be complicated, and that is why you need your accountant’s advice in order to properly file for personal services income.
The professionals at Tim Nash & Associates can help you when determining your qualification for alienation of personal services income. Give us a call today and find out how to be certain your consulting or independent contractor business qualifies.