Side hustle Income Distribution

Discussion in 'Accounting & Tax' started by albanga, 15th Jun, 2019.

Join Australia's most dynamic and respected property investment community
Tags:
  1. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    2,026
    Location:
    Melbourne
    Before anyone mentions it I am definitely going to see my accountant :).
    Like most things I just like to have a basic understanding of how things work before I discuss them.

    Situation is I have a side hustle where I consult earning roughly 30k per annum. The current structure is just self employed.
    I also of course have my PAYG where I earn considerably more. Not yet in the top bracket but currently paying my side hustle at the 37% bracket.

    My wife however is no longer working with our first baby on the way and TBH probably won’t be for a while.

    So I was thinking about how I may be able to distribute my side hustle income to her to take advantage of her lower tax bracket.

    I know everyone’s situation is different but is there usually a recommendation in these situations. I imagine there is some kind of income benchmark where the benefit offsets the cost of setup and management of say a trust.

    Thanks in advance
     
  2. Marg4000

    Marg4000 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    3,832
    Location:
    Qld
    I reckon you would have a better chance if your side hustle was something your wife could realistically do herself, I.e., importing and re-selling. That way you could argue that she was actually doing the work.

    If it is something that only you can do, (like professional work or consulting), I don’t like your chances.
    Marg
     
  3. Simon Hampel

    Simon Hampel Founder Staff Member

    Joined:
    3rd Jun, 2015
    Posts:
    4,216
    Location:
    Sydney
    Set up a company to run your consulting business and then have a discretionary trust with (separate) corporate trustee, owning the shares in your consulting company. Run all income and expenses through consulting company, then pay profits as dividends to trust. Trust then distributes net income to beneficiaries (ie wife if she is on lower tax bracket).

    You can probably do the sums - look at startup costs depreciated over something like 5 years plus annual management costs, then consider the amount of tax saved.

    If the tax saving is greater than the setup/running costs, then it might be worth considering.

    There are some tax benefits to running things through a company as well - but it still might not be worth while.

    Is asset protection an issue as well? What is the risk profile of the consulting work you do? Could get double benefit out of the trust by looking at using it for longer term asset protection purposes.

    This approach would add a lot more administrative overhead though - need to take into account the extra time commitment in your calculations.
     
    albanga likes this.
  4. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    2,026
    Location:
    Melbourne
    I know heaps of people who run companies where distributions are paid to wives and even children (small tax free allowable amounts). I would say this is an extremely common situation where beneficiaries don’t actually do a thing in the company. Or perhaps they do “admin” ;)
     
  5. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

    Joined:
    18th Jun, 2015
    Posts:
    21,044
    Location:
    Remote
    albanga likes this.
  6. Mike A

    Mike A Well-Known Member

    Joined:
    24th Jun, 2015
    Posts:
    1,538
    Location:
    :
    And how would this not be a breach of the psi rules ?

    Im even more uncertain why part iva wouldnt apply even if it was a personal services business (the ato facsheet on it is very clear)

    http://www.professionalsaustralia.o...to_bulletin_on-anti-avoidance-and-PSBspdf.pdf
     
    Last edited: 15th Jun, 2019
  7. Mike A

    Mike A Well-Known Member

    Joined:
    24th Jun, 2015
    Posts:
    1,538
    Location:
    :
    Which is all fine until their mates have a falling out and the mate wonders why 3 years later they are getting an audit. Better for the ato to wait a few years so penalties and interest accrue.
     
  8. Ross Forrester

    Ross Forrester Well-Known Member Business Member

    Joined:
    30th Oct, 2016
    Posts:
    1,668
    Location:
    Perth, Western Australia
    For 30k it is not worth it. Even if you could do it (which you can’t based on the short evidence due to psi).
     
    Mike A likes this.
  9. Mike A

    Mike A Well-Known Member

    Joined:
    24th Jun, 2015
    Posts:
    1,538
    Location:
    :
    Agreed ross

    And even if it was a psb the ato looks at market salary paid to the person earning personal services income.

    People forget that even if you have a personal services business you the need to look at part iva. That was the whole point around the consultation paper re professional practices and income splitting
     
    Ross Forrester and Terry_w like this.
  10. Simon Hampel

    Simon Hampel Founder Staff Member

    Joined:
    3rd Jun, 2015
    Posts:
    4,216
    Location:
    Sydney
    I was working on the assumption that there were multiple clients that he was consulting for. If it is just a single client, then yes - PSI becomes an issue - good point.
     
  11. Mike A

    Mike A Well-Known Member

    Joined:
    24th Jun, 2015
    Posts:
    1,538
    Location:
    :
    Multiple clients might mean he meets the 80/20 rule PROVIDED those clients are as a direct result of advertising services to the general public at large.

    BUT even if it is a PSB Part IVA will probably apply and he will need to pay himself a market salary BEFORE any distributions or retention of profits.

    Cooper Grace Ward have an excellent article on this matter

    https://www.cgw.com.au/wp-content/u...sional-firms-Fletch-Heinemann-August-2015.pdf
     
    Ross Forrester likes this.
  12. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    2,026
    Location:
    Melbourne
    Hi All,

    Thanks so much for the detailed responses.
    When I wrote this I was initially thinking of something along the lines of setting up a company with trust but based upon what your saying that’s still not possible or feasible.

    Sounds like the best I can probably do is have my wife contract to me for an hour or so a week to do the business admin/marketing/bookkeeping?

    This actually wouldn’t be a stretch because of her background. And TBH she will have the time now to run these for me. Looks like I can enjoy some quality Xbox at home whilst she works now ;)
     
  13. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

    Joined:
    18th Jun, 2015
    Posts:
    21,044
    Location:
    Remote
    depends on the nature of the business - you may still be better off with a company with shares owned by a trustee, but it will depend on the circumstances. Even if PSI applies it can still be good as at some point in the future the 'business' may grow.
     
    albanga likes this.
  14. Mike A

    Mike A Well-Known Member

    Joined:
    24th Jun, 2015
    Posts:
    1,538
    Location:
    :
    Even that would be denied in an audit

    Payments made to an associate (for example, spouse, child or other relative) cannot be claimed as a deduction for performing non-principal work.

    Non-principal work is incidental or support work that is not central to meeting obligations under a contract. Examples include bookkeeping, issuing invoices, secretarial duties and running the home office.

    Claiming deductions when receiving PSI
     
    albanga likes this.