Accountants say tens of thousands at risk from contractor crackdown on personal services income

Accountants are tipping tens of thousands of people could get caught up in a Tax Office crackdown on misuse of personal service income regulations.

Nexia Court & Co partner Sean Urquhart says the Australian Taxation Office has been sending letters to tax agents and individuals warning of upcoming audits of 2010 accounts.

This is focused on consultants and contractors who operate as a sole trader or through a company, partnership and classify their income as personal services income.

“The personal service legislation goes more than a decade, and came in because everyone was an employee on Friday but came back as a contractor on Monday,” Urquhart says.

The benefit of this was qualifying for the company tax rate of 30%, rather than personal income tax rates.

But Urquhart says the Tax Office has taken note of people interpreting the legislation to allow them to distribute income to family members, for example. This misuse, he says, is quite prevalent.

These notice to audit letters generally spur people into action, Uquhart says, giving them the opportunity to make a voluntary disclosure to trim penalties. It also comes as the Government seeks to claw back revenue to return the budget to surplus.

“If you come forward and say you’ve made an error, the Tax Office will remove a substantial amount of those penalties,” he says.

To classify as personal services income, a majority of an individual’s income must come from labour, rather than materials or tools, the ATO says.

There are further tests, such as no more than 80% in one year coming from one client or associate of the client.

The following is not PSI:

• Income from selling or supplying goods.
• Income from an income-producing asset, such as a bulldozer or printing press.
• Granting a right to use property, such as copyright or a computer program.
• Income from a business structure.