Paying partner a wage as a sole trader

Hi everyone.

My partner is pregnant and needs to stop working at her job (barista) due to health concerns.

I am currently operating as a sole trader (wedding photographer) and would like to pay my partner to do my admin/editing etc. My motivation for doing this is I am going to have to give her money to live off anyway and would be a good way to claim some tax deductions. (she will genuinely be working 12-15 hours a week). Also, if she is employed up until she gives birth she is entitled to paid parental leave which would help us out a lot financially. I am not registered for GST and therefor not doing BASS statements

So far I am in the process of getting workers comp.
Registered as a PAYG withholding with the ATO (although technically she wont be paying any tax on such a minimal wage)
And I need to pay her superannuation which I will look into soon

My question is. Is there anything I am missing?

Do I need to register her tax file number anywhere?
Do I just claim her payslips/group certificate as a tax deduction when I do my business tax

Thanks for your help

 

First stop is an accountant. You must avoid any arrangement being declared a tax dodge.
Marg

 

Yes you need to notify the ATO that she will be employed by you with a TFN declaration form. You used to he able to get these from post offices and newsagencies but now are limited to the ATO website from my understanding.

TFN declaration | Australian Taxation Office


The rest you seem to be on top of as far as compliance goes. Super, Worker's comp etc.
Any employee expenses such as wages, super, WC will be deductible.

 

See an accountant.

I'm self-employed and work with my partner and our (new) accountant is still very nervous about the arrangement our previous accountant set up for us.

Despite the fact that we can prove beyond doubt that we actually do work together, he still wants to go to the ATO to get a private ruling for us.

We use a family trust structure, rather than messing with wages/superannuation.

 

Personal services income (PSI) cant be paid to a spouse unless they perform the income producing activities. ie not bookkeeping or admin but wedding photography services. The apparent issue here is for you to obtain a tax benefit from apportioning income. This is and always has been prohibited by various provisions of tax law and as a last resort the ATO could consider Part IVA applies to the scheme and deny your sole trader deduction.

The quick suggestion that I'm expecting someone to post is to use a trust - Say a disc trust. But if the income is PSI this may be problematic as the trust may be bound to allocate its income to you for tax purposes (attributed personal services income). I would suggest personal tax advice. If you spouse is involved in the true income production a restructure may be worth considering to avoid sole trader issues.

Then there is the issue of workers comp too. You may breach state law if spouse isnt covered by W/Comp. Do you realise you arent ?? That may be a sound reason to not operate as a sole trader.

 

Hi Paul - are you saying that if you run a biz through a trust, and one spouse works for the biz and the other doesn't that you can't distribute the trust earnings 50/50?

If that's the case, would paying the working partner a reasonable wage through the biz negate that?

 

Step 1: will the arrangement stack up?

A) Personal services income ?

Are you (the photographer) deriving assessable income primarily in respect of your personal services or skills?

If so, payments to associates for non-core services such as admin may not be deductible.

However there are exceptions from these harsh provisions, one of which is the unrelated clients test.

If you directly advertise to the public to acquire your clients then this is good. Merely being on call to an agency as a supposed contractor may not be good.

B) Even if you are carrying on a personal services business, The Commissioner may form an opinion that this is a tax avoidance scheme.

Keep evidence of the substantial contribution your spouse makes for the "payments" in case of dispute.

 

Payment of salary or trust distribution may ignored for the PSI rules. This is a complete reconstruction for tax purposes.

Research on what a personal services entity (PSE) is.

The question is whether the income is subject to this regime.

 

Thanks for your help everyone.. She will primarily be editing photos and creating albums which I assume would be considered core duties under a photography business

I advertise directly to the public and I have new clients for each business transaction

The ato is not aware we are together as we are not married but I don't want to lie to them either

 

Spouses are both required to complete sections of the tax return/s in a certain way. A spouse includes a defacto and same sex partnership. This issue can influence Centrelink and other non-tax outcomes as well as private health insurance offsets etc.

This flowchart may assist with the decision mentioned by Rob
https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/Working_out_if_the_PSI_rules_apply.pdf

In many cases the income is PSI but if the results test may assist to exclude the regime and allow your partner to be paid or receive distribution etc. Worth getting personal advice to avoid errors. And avoiding being a sole trader !!

 

Not quite. If its personal services income use of any form of entity and paying a spouse is disregarded (in a special way). Instead correct approach is to consider the flowchart and determine if it is PSI that is excluded. If so, then it may be worth switching from sole trader to another entity. There are many sound reasons why not being a sole trader isnt a Part IVA concern. Perhaps a Disc Trust which allows income to be distributed rather than wages etc paid. Both working beneficiaries etc would be eligible to be covered by workers comp too.

A Disc Trust might be able to distribute in many ways - Not necessarily 50/50.

 

Do you live together at the same address?
Are you the father of the coming baby?
Will you be listed as the father on the birth certificate?
Will your partner be claiming maternity leave, family benefit etc?

Questions for you to ask yourself (I do not want or need to know the answers).

If the ATO are not aware now that you are together, then they soon will be, unless you are less than truthful when filling out forms, which is another issue entirely.
Marg

 

Looks like principal work.

Looks like you pass the results test anyway.

Keep evidence of setting a reasonable hourly rate and actual timesheets to support you in any dispute.

I assume you have also taken advice concerning professional indemnity insurance for yourself or even the use of other business structures for asset protection. These are strategic issues which require a cost/benefit analysis for your circumstances and is an area for a lawyer.

 

Bit of a thread dig here. Am I correct in understanding that even if you are earning PSI as a sole trader, if the "PSI rules" do not apply to the situation (e.g. completing the ATO online tool Calculators and tools_Host tells you "The PSI rules do not apply"), then you may claim deductions for payment paid to a spouse for support work? Assuming reasonable hours and rates for the tasks performed.

 

No. Other laws and ATO views may impact paying a spouse. And, I dont think I have ever met a taxpayer who correctly completes the PSI flowchart. It is seemingly simple but not.

Generally there is no concern when the spouse also performs the income producing work (rather than say bookkeeping) and all tax compliance is met eg Single Touch Payroll and PAYG reporting. From 1 July 2019 a simple issue like not reporting and paying wages through the PAYG withholding process will deny all salary and wage payment deductions and is a good example of other laws. The days of employers claiming wages and paying cash have ended.

Generally speaking sole traders should not be a employer. Seek legal advice.

 

Could not the partner just become a partner in the business?

 

One of the simple reasons not to be a sole trader or in partnership is workers comp.
Compare the pair.

Fred is a tiler and works as a sole trader. He slips and falls at work one day and cant work for three months. He has to pay his own medical treatment and has a income of $0. But Fred's buddy Jimmy sought advice and operates through his company - Jimmy's Tiling Pty Ltd. The company needed a workers comp policy that costs approx 1.5% x wages which is expected to be $85K so a premium of $1400. Jimmy co-incidentally also slipped and fell damaging his knee ligaments and cant work for three months. His medical expenses and his wages are being paid by his workers comp. And since it was workers comp he had it done in a private hospital by a doctor well known for knee reconstructions. But Fred had to have his op done at Westmead Hospital after a 10 day wait. Jimmy's insurer is also making sure he gets good rehab so he is fit as soon as possible and he visits a physio several times a week. All paid for. Jimmy is also surprised when he sees super contributions come in too. The insurer also made sure that was paid too.

 

Alienation of income
Part IVA
PSI
may all be issues of concern

I quote an often quoted passage from a New Zealand case (Spratt v IRC (NZ) 1964 9 AITR 227):

"no taxpayer can, by way of assignment, escape assessment of tax on income resulting from his personal activities - such income always remains truly his income and is derived by him irrespective of the method he may adopt to dispose of it."

ATO Ruling IT 2121 is of particular concern Legal Database

PSI rules aim to reflect a statutory limit based on these views but the common law views may also apply where apparent PSI compliance is evident

 

I hear all your reasons as to why it may not be possible.
However there are thousands of small businesses in Australia, many of which the wife may do legitimate work for the family business. Are you saying that just because that work is administration related, it rules them out of paid parental leave? Secretaries (or "personal assistants") and office managers are real jobs, why do they surrender rights because they work for a family business as opposed to any other business.
So are there accounting solutions to solve the problem as well?

 

Each case must be determined on its own merits. Personal Services Income rules prohibit a spouse being paid for example. There may be sound reasons for them to be paid for actual efforts but it is not permitted. Its a abuse limiting rule. Like the one about travel and rental properties.

When I am asked I seek to determine where possible that PSI is not a concern. And where it is they need to meet other tests ie : Do they perform "principal work" ? A Doctors spouse for example may need to practice medicine and meet the PSI tests and cant be a secretary if he is a sole trader. But in other cases they most certainly could be paid by a practice management entity.