Personal Services Income - Contractor Or Employee?

Date: 06/10/2010

If you want to be taxed as an independent contractor, make sure you can demonstrate that you're not an employee

The Australian Tax Office is once again paying attention to the vexed topic of personal services income and the distinction, for tax purposes, between independent contractors and employees. Michael Jones of Cummings Flavel McCormack says it's an issue that's been with us since the 1980s, with new rules introduced in 2001 to redefine personal services income and how it's treated. But recent court cases suggest that some people still don't have a clear understanding of those rules and the exceptions to them. The important thing, he says, is to look at the contract under which services are being provided: can the work be delegated to someone else? Does it contain a negotiated price to produce a particular result? Is the risk in the event of something going wrong covered by the contractor? Another useful guideline is the so-called "80-20" test: if you're receiving 80 percent or more of your income from a single client, you may have to prove you're not an employee. It's important in that context to be able to demonstrate that you have actively made offers to reach other clients, by advertising or maintaining a website.

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Michael Jones, Cummings Flavel McCormack