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One person one client company

Discussion in 'General Investing Discussion' started by rajiv, 16th Sep, 2008.

  1. rajiv

    rajiv Member

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    Hi,

    I am seeking some observations (not formal advice) on whether it is legal to have a one person-one client company instead of sole trader to pay taxes at a lower corporate rate vis a vis higher personal tax rate?

    Thanks.

    Cheers,

    Rajiv
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    It's not illegal to set yourself up as a company, but if all of your income comes via the one source, the personal services legislation will catch you and the ATO will force you to pay tax as if you had been a sole trader - which kind of defeats the purpose.

    There are other ways of doing this - the main benefits you need are flexible salary packaging services which allow you to get some of the benefits of running a company, while fulfilling your obligations to the ATO - there are companies which operate services for consultants/contractors like yourself ... but unfortunately I don't know any of them, so can't make any recommendations.

    Perhaps some of our other members are more familiar with this type of thing.
     
  3. Waimate01

    Waimate01 Well-Known Member

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    Only true if the nature of your business involves the provision of personal services. So if you are a contract programmer or something else for which you would normally get paid proportionally to the hours you put in, then you run afoul of the ATO. But if you run a one-person import/export business, gold prospector, hot dog stand or rent your dog out to lonely people, then you are quite ok.


    Step by step guide - personal service income
    Definitions - personal services income
     
  4. rajiv

    rajiv Member

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    IT services consultant

    Thanks for the response everyone. Yes I am referring to an IT consultancy services contract where I will be paid proportionate to the hours I put in.

    So do I gather that it might not be prudent to set yourself as a company as it might "run afoul to ATO".

    Cheers,

    Rajiv
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Of course. I made that statement in the context of someone who is looking to provide personal services. Perhaps I should have been more explicit.

    Sure - but your income doesn't come from a single source from those examples, which makes it a completely different game and completely legitimate to be operating as a business.

    There are various attributes the ATO looks at - and I generally refer to these as the "duck" test. If it looks like a duck, walks like a duck, quacks like a duck, it quite possibly is a duck. Similarly, if you run a business in a business-like manner, have a business premises from which you operate the business (not strictly necessary - but a good indication for a positive test), and generally behave as if you are in business, and not just a defacto-employee ... then you generally have a good case that you are indeed running a business.
     
  6. Waimate01

    Waimate01 Well-Known Member

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    Have a look at the flowchart I linked to. The multi-source aspect does not apply until *after* the personal services test. Thus it is quite ok to be a hot dog vendor who sells hot dogs to a single customer, or imports Balinese carvings and sells them to a single distributor.

    If it is not personal services income, then various duck tests are not applied.
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Check out some of the companies linked to in this thread on Whirlpool ... they offer salary packaging and other services to contractors (for a fee):

    Contractor: Salary Packaging Companies? - IT Industry

    Here's some others I found:

    Comprehensive administration, accounting and payroll services to individual employees and their employers - CXC AU
    myITG

    I don't know anything about these companies or the services they offer - so this is not a recommendation or endorsement.

    Please keep us informed if you do go down this path - I would be interested to hear your experiences.