From Aussie contractor site www.Brainbox.com.au
Tax in Australia is applied at various levels. The top marginal rate is 47% kicking in at A$60,000 (approx. US$30,000), and includes a 1.5% and 2.5% Medicare levy.
Australia also has a Goods and Services Tax (GST) of 10%. And the fun doesn‘t end there. Superannuation (pension) is compulsory at 8% in 2001 and 9% in 2003 and beyond.
This is concessionally taxed at 15% on contribution and 15% on withdrawal, excluding high-income earners.
Superannuation tax increases by 1% for every A$1000 earned over A$78,000, peaking at 30% on all contributions for income earners of over A$93,000pa and compulsory superannuation has to remain in the country until the retirement age of 60+ (that‘s if there‘s any left after administration fees are deducted).
New Tax System
In June 2000 Australia introduced a new tax system based on the Ralph Report prepared for government. The Alienation of Personal Services Income Bill 2000 was an integral part of this Ralph Report which effectively prevents contractors who derive their income from their ‘own personal exertion’ from gaining any advantage by using a company, sole trader or similar structure to reduce tax liabilities.
Small contractor companies, where the bulk of income is earned from the personal exertion of the director/shareholder, are being severely disadvantaged by these new rules.
The Alienation of Personal Services Income Bill 2000 legislates that if 80% of your income is from a single source you‘ll be treated a as ‘Personal Services Entity’ and this limits the expenses you are able to claim to less than those of a PAYG employee.
End User Employer
In the application of this test they look at the end user as the ’employer’, not the agency. Working for multiple agencies and the same end user does not get around the legislation.
Contractors who choose to use their own companies will need to undertake a self-evaluation but run the risk of making a mistake and facing severe penalties.
There‘s no doubt the situation is now far more complex, with the options for tax minimisation significantly reduced.
The preparation of quarterly BAS has also proven to be a time consuming and confusing burden and in implementing the Alienation of Personal Services Income Bill 2000 the ATO has removed the option for individual contractors to gain any advantage from running their own company.
The Enterprise Test and Personal Exertion tests will negate many personal exertion companies if not in the first round, then in subsequent audits.