Federal Court provides clarification on the PSI rules
The Federal Court recently handed down two
decisions relating to the personal services income
('PSI') rules.
Income is classified as PSI when more than 50%
of the income received under a contract is for a
taxpayer’s labour, skills or expertise.
The PSI rules are integrity provisions which ensure
individuals cannot reduce or defer their income tax
by (for example) diverting income for their personal
services through companies, partnerships or trusts.
If the rules apply, the individual is taxed on the
income directly.
The rules do not apply if at least 75% of the
individual’s PSI is for producing a result, where the
individual supplies all the required 'tools of trade'
and is liable for rectifying defects in the work (this
is known as the 'results test').
In the first case, the Federal Court confirmed that
the taxpayer did not meet the 'results test'.
The taxpayer argued that the 'results test' is still
satisfied even if they do not get paid for achieving a
result, provided they can show this is the custom or
practice of independent contractors in their industry.
The Federal Court rejected this, agreeing with
the ATO’s earlier determination to apply the PSI
laws to tax the individual’s contract income as his
own income, rather than income split through a
partnership with his spouse (which also meant
certain deductions were not allowable).
The Federal Court also affirmed the imposition of
penalties for recklessness.
However, in the second case, the Federal Court
allowed the taxpayer’s appeal from an earlier AAT
decision, that he had failed the 'unrelated clients
test' despite advertising his services on LinkedIn.
The Federal Court found the ATO and AAT had
applied an exception for services provided through
intermediaries (e.g., recruitment agencies) too
broadly, and instead the Court preferred a narrow
interpretation of the exception.
This matter has now been referred back to the
AAT to be reconsidered, and the ATO has said it
will consider this decision and whether an appeal
is appropriate.
Deductions for a company or trust home-based business
The ATO has reminded taxpayers that, if they run
their home-based business as a company or trust,
their business should have a genuine, marketrate
rental contract (or similar agreement) with
the owner of the property.
The agreement will determine which expenses the
business pays for and can claim as a deduction.
If there isn’t a genuine rental contract, there may
be tax implications for the homeowner and the
business for providing benefits to any individuals.
If an individual earns PSI, they may not be able to
deduct some occupancy expenses.
If the business pays for or reimburses an employee
of the business for some of the expenses of running
the business from home, the employee can't claim
a deduction for those expenses in their individual
income tax return.
Also, the business may have to pay FBT if it pays or
reimburses the individual for certain expenses as an
employee (although exemptions and concessions
may apply to reduce the FBT liability), and may
need to keep additional records for FBT purposes.
ATO impersonation scam update
Editor: Unbelievably, scammers are still successfully
bilking Australians out of tens of thousands of
dollars, as a recent ATO scam report shows.
-
According to the July 2019 ATO impersonation
scam report:
- 6,179 online scam reports were received in the first month of their new online reporting form going live;
- 6,645 phone scam reports were officially recorded, and 465 phishing scam emails were reported to reportemailfraud@ato. gov.au;
- 520 taxpayers provided scammers with their personal identifying information including date of birth, tax file number, driver's licence number and notice of assessment details; and
- $197,057 was reported as being paid to scammers, mostly by iTunes and Google Play.
Using the cents per kilometre method
The ‘cents per kilometre’ method broadly allows
an individual taxpayer to claim up to a maximum
of 5,000 business kilometres per car, per year
without the need to keep any written evidence
(e.g., receipts) of car expenses.
Importantly, taxpayers making a ‘cents per
kilometre’ claim are required to demonstrate that
they worked out the number of business kilometres
they claimed on a reasonable basis
Taxpayers claiming under this method will generally
fall into one of two categories, being either those
who undertake a regular or irregular pattern of
work-related travel.
If a taxpayer has a regular pattern of workrelated
travel (e.g., a 60 kilometre round trip to
the warehouse to pick up supplies twice a week,
40 weeks in the year), then this type of explanation
would generally be sufficient to justify the claim.
However, if the taxpayer has an irregular pattern
of work-related travel, then they would need to
make a note (e.g., in a diary) of each trip.
Also, remember that, for the 2019 income year,
the rate that is applied (up to the 5,000 business
kilometre maximum) is 68 cents (up from 66 cents
in 2018) per business kilometre travelled.
Measuring the integrity of the ABR
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From September, the Australian Business Register
('ABR') will contact a random sample of ABN holders
across all entity types to:
- discuss how they use the ABN, and check their understanding of how ABNs are used;
- find out about their registration experience and ask for suggestions for how they can improve it; and
- if applicable, confirm their entitlement to the ABN (although the ABR will not cancel ABNs unless requested).
The ABR is trying to understand and improve the experience for clients applying for, maintaining and cancelling an ABN, and will use the information to measure ABR data quality.
Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.