80/20 rule

Hi all,

I got some scenarios on my head that is begging for answers, hope you guys can help.

If I have a partnership with my wife and we are both I.T. contractors and we have only one client each for the entire financial year, are we in violation of the rule?

What if I am a sole trader and I employ my wife and she consults to client A while I work on client B?

What if I am a sole trader with only one client for the year but have an existing rental property? Does that mean that I don't ever need to worry about having a long term contract since I have another source of income? Even if the rental property is technically not yet generating an income?

Thanks,
mrees

 

All are dependent on more conditions than you have listed for a trustful and confident idea whether or not you could survive and thrive. For example, to your scenario 1:

"If I have a partnership with my wife and we are both I.T. contractors and we have only one client each for the entire financial year, are we in violation of the rule?"

How much could you get from the clients? What's your understanding or rule 20/80? A client pays $1,000,000 or $100 could mean completely different financial matter to you and your wife. I guess the payment is between. Do you mean you get 80% of income and your wife get another 20%? It is my understanding that 20/80 rule is about the statistical calculation of the rate for what we want or what we don't want and usually the 20% of things in our life would set the course for us. It could mislead us to use this rule in a special case. How about both of you make 50% but quite good payment?

By the way I could misunderstand you. If so please forgive me. Do pope above could be used as stone for your better ideas how to design your future life, incomes, and tax. Good luck!

 

For this topic, let's assume that my wife and are I making an equal amount of 50k a year from client A and client B.

 

Think you need to clear up a few concepts before trying to understand the PSI rules.

If you are an IT contractor, you are not a sole trader.

A sole trader makes income from margins on turning over assets (trading stock).

A sole practitioner makes income principally from their own personal services. The PSI rules attempt to prevent an individual diverting income that is principally from their own personal services.

A partnership at law is where two or more people conduct a business jointly with a view to profit. This means being in receipt of JOINT income from the business structure.

If you individually have your own clients, this is not joint income from a business conducted in common.

Employment is a contract of service, the essence is control. The employer dictates what is done and how, and the employee is paid a rate regardless of results.

A crucial concept for the independent contractor is the results test.

Cheers,

Rob

 

This is how I understand the situation and please do correct me if I'm wrong.

In the ATO website there are several choices for a business structure. Sole traders, partnerships, Companies and Trusts. In my situation, if I'm going to start contracting I've narrowed my choices to Sole traders or partnerships (me and the wife).

The IT contracting/consulting industry is akin to being a tradie. I can be a plumber with an ABN number operating as a sole trader and not have problems with the 80/20 rule because I get a lot of different clients on an annual basis. Sometimes or slightly more often an IT contractor will get a long term contract (1 year or more) for a client with a large project implementation - and this is where the 80/20 rule comes into play.

As a sole trader, I can also employ people. And if I have say five guys deployed on different clients, I don't have to worry about the 80/20 rule. And this will be true even if I have only one employee (the wife) as long as she is assigned to a different client.

Now is the above scenario an acceptable/legal way to circumvent the 80/20 rule?

 

There is a lot of common law legal criteria for an employment relationship.

PAYG and SGC as well as FBT draw on this common law concept.

Regardless of "employing" your associate, you may be deemed an employee by the PSI regime under *your* contract with your client. The concept of control and results etc.

Then the next problem is that employing an associate under PSI rules requires them to be doing substantial principle work where both you and they provide what is dominantly personal services. The associate, now an employee, is unable to access a wide range of deductions in their own name.

There are also heaps of problems with assigning personal services contracts in your restructure.

Also, where a PSB is deemed to be carried on, the Commissioner still reserves the right to apply Part IVA legislation where a scheme appears to be carried on for a dominant purpose of a tax benefit.

Basically, it doesn't matter what you call yourself, the facts will be looked in the light of the abovementioned laws.

Better get some multi-discipline advice (legal & tax) before acting.

Cheers,

Rob