tax question small business

Hi all,

I'm a plumber and currently a sole trader working for my self 1 man band and currently considering getting a company structure for tax purposes. i work for home owners etc advertise on google

Accountant A has told me that if i set up a company structure with a family trust can i distribute the profit to family members etc my sister/dad and it can be taxed at their lower rate and then they can just transfer it back to me which is allowable.


"Personal services income (PSI)
Personal services income (PSI) is income produced mainly from your personal skills or efforts as an individual. Income is classified as PSI when more than 50% of the amount you received for a contract was for your labour, skills or expertise."


Accountant B has said that this is not true due to the tax rule above ^ which is correct? is there anything that can be done as i'm soon expected to be in the highest tax bracket (excl neg gearing etc)

Cheers, Elives

 

You are a plumber working for someone else or you have your own clients ? Advertising your services to the public ? Using your own tools ?

 

i work the public / home owners i advertise on google. i have my own clients.

 

@Elives to me that sounds like you meet the unrelated clients test.

1. no one client provides more than 80% of the total income
2. there are at least 2 unrelated entities
3. the services are provided as a direct result of offering services to the public at large

if a PSB then PSI rules wont apply.

You then need to consider the rules re splitting of income. ATO has new guidelines they do require some sort of market salary to be paid first before splitting any remaining business profits.

Unfortunately both Accountant A and Accountant B are incorrect but for different reasons.

 

asset protection issues to for under-remuneration.

 

License is with the individual ? Qualifications etc ?

How can a trust perform trade work ?? The purpose sounds like its driven by the chase for a tax benefit....Thats a possible concern. Mike's on the issue and closest to the spot.

 

1. what is unrelated clients test and what does that mean to my situation?

2. am i a PSB what are the requirements for this exemption from psi?

 

yes license and quals are with the trade person. my understanding is the business trades out of the company and the profit goes from the company to the family trust and then is distributed from there.

 

elives might be time to sit down with a business savvy accounting firm to work through those matters. might well be some opportunities for you and it probably needs to be explained to you.

as @Paul@PFI says the company (trustee company if acting as trustee) might need to have a license as well.

 

Thats actually not correct. The trustee is a company. The income would be earned by the tradesman. NOT the trust. BUT you want the trust to report it. Thats what makes it personal services income (maybe). There may be a valid reason for a trust to operate a business

If you are in Melb Mikes the guy. Not cheapest but not a waste of money. He knows this stuff & is well experienced.