Join Australia's most dynamic and respected property investment community

Paying partner a wage as a sole trader

Discussion in 'Accounting & Tax' started by LCK, 24th Feb, 2016.

Tags:
  1. LCK

    LCK Active Member

    Joined:
    20th Jul, 2015
    Posts:
    39
    Location:
    Sydney
    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
     
  2. Marg4000

    Marg4000 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    924
    Location:
    Qld
    First stop is an accountant. You must avoid any arrangement being declared a tax dodge.
    Marg
     
  3. York

    York Finance Broker Business Member

    Joined:
    24th Jun, 2015
    Posts:
    1,621
    Location:
    Sydney
    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.
     
  4. emza

    emza Well-Known Member

    Joined:
    9th Feb, 2016
    Posts:
    216
    Location:
    QLD
    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.
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,385
    Location:
    Sydney
    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.
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,781
    Location:
    Perth WA
    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?
     
  7. Rob G

    Rob G Well-Known Member

    Joined:
    16th Oct, 2015
    Posts:
    168
    Location:
    Melbourne
    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.
     
    Last edited: 24th Feb, 2016
  8. Rob G

    Rob G Well-Known Member

    Joined:
    16th Oct, 2015
    Posts:
    168
    Location:
    Melbourne
    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.
     
  9. LCK

    LCK Active Member

    Joined:
    20th Jul, 2015
    Posts:
    39
    Location:
    Sydney
    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
     
  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,385
    Location:
    Sydney
    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 !!
     
  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,385
    Location:
    Sydney
    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.
     
    Jess Peletier likes this.
  12. Marg4000

    Marg4000 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    924
    Location:
    Qld
    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
     
  13. Rob G

    Rob G Well-Known Member

    Joined:
    16th Oct, 2015
    Posts:
    168
    Location:
    Melbourne
    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.
     
    Paul@PFI likes this.