Beware - The Taxman is looking!
Beware of Labour-hire firms and recruitment agencies offering tax minimisation schemes which promote splitting income between workers and their spouses in order to minimise tax.
Hundreds of taxpayers and dozens of employers who are using trusts to pay contractors and consultants have until April 30 to contact the Tax Office before it investigates companies and taxpayers involved with the schemes. "I'm concerned that people involved in this arrangement may be unaware of the risk that it may be ineffective under the taxation laws and the superannuation guarantee provisions," tax commissioner Michael D'Ascenzo said. "We are concerned that individuals may enter into these arrangements to reduce tax liabilities by splitting their income with an associate and that the arrangement may not satisfy the personal services income tests and that the anti-avoidance provisions could possibly apply," he said. The Tax Office has promised a reduction in penalties that might apply if taxpayers come forward.
The tax schemes recently uncovered by the Tax Office involve a firm, usually a labour-hire or contract management firm, offering a remuneration to individuals, including high-end executives and IT workers, which involves paying them via a trust associated with the labour-hire firm. The trust then pays the individual and one of the person's beneficiaries, who is usually a spouse. Instead of being paid a straight wage with the usual employer obligations such as withholding tax, superannuation and workers' compensation, the labour-hire firm splits the income between the worker and his or her spouse, which minimises the couple's income tax bill.
The clients of labour-hire firms that use these types of trusts can also expect attention from the Tax Office. CPA Australia policy director Paul Drum said the Tax Office warning was unusual because many taxpayers might not realise they had broken tax laws and companies that encouraged their contractors to use the trusts could be inadvertently in breach of serious promoter penalty laws.
Mr. Drum said wage earners had been trying to split their income with their spouses since the 1980s but the practice had largely been stamped out by the Tax Office in the 1990s.
Independent Contractors Australia executive director Ken Phillips was aware of such trust arrangements. He said he was not surprised the ATO had raised questions about such transactions.
The ATO also warned that labour hire firms, recruitment agencies and their clients might not be withholding the right amount of tax or paying the correct superannuation to contractors working for them.
"The ATO is reviewing these [labour-hire] arrangements and will be writing to entities advising them about our concerns that they may risk contravening tax laws," Mr D'Ascenzo said. The Tax Office applies a number of tests to determine whether contractors and consultants are earning personal-services income or a wage. These include having no one client generate more than 80 per cent of a contractor's income and obtaining work through advertising the contractor's firm, not as a result of placing their name with a recruitment agency. For more information on the 80% rule go click here.
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This article was published in the Australia Freelance Market-News 64.