The Australian Taxation Office has issued a detailed tax ruling dealing with the increasingly important and rapidly growing sector of contractors.
As more and more services are outsourced and more employees lose their full-time jobs, those made redundant, as well as those who have chosen more control over their working hours, are turning into contractors.
The ruling sets out what can and cannot be claimed by the individual delivering their personal services in conjunction with a company, partnership or trust.
As with all tax matters, there is nothing simple about going out on your own and being a one-person service provider with some assistance.
The ruling makes it clear that rent, mortgage interest and rates and land tax can be deducted for business premises. But if the service provider works from a home office, another tax ruling relating to home offices applies.
Essentially this ruling allows the service provider to deduct the cost of heating, cooling, lighting and furnishing the home office, but does not allow part of the mortgage interest to be deducted.
This is because it is argued that the size of the mortgage and the interest cost would be the same if the room were not used as a home office. It would simply be another room in the same house, used for private purposes.
Then there is the complex area that relates to deductions for payments to associates, says Peter McDonald of Taxpayers Australia.
For an individual, an associate includes a relative or a partner or partnership, spouse or child, as well as a trustee of a trust estate from which the service provider receives a benefit.
In the past, many service providers simply employed their spouse, partner or child and the service provider split his or her earnings with that associate.
On top of that there were two lots of super contributions made and two lots of deductions for those contributions.
This occurred whether or not the spouse, partner or child actually did substantial work in the business. Many associates were answering the phone, tapping out the odd letter and taking mail to the post office - essentially working part-time, but being allocated half of the main service provider's income, thus reducing the income tax that would otherwise be paid on one income.
But according to McDonald, the ATO has clamped down on this practice and now requires associates to prove they are performing substantive or core work for their earnings.
If they perform core work, or spend most of the working week assisting the main service provider to bring in dollars from services provided, either assisting to deliver the services to clients or running a busy office, then the ATO would agree that the associate is entitled to their salary and would be entitled to super payments as well.
Both costs would be fully deductible by the main service provider.
However, the work cannot be merely ancillary or peripheral to the business. The associate's work has to be an essential part
of the business.
The onus now is on the taxpayer to prove that this is the case. The ATO tends to take an unsympathetic view to deductions for support services and super contributions for those support providers, and requires convincing that the work provided is core work.
Other deductions allowed include bank fees, tax-related expenses, the cost of lodging documents with government agencies, and licence fees.
Car-running expenses are fully deductible if the car is used only for work purposes. A claim can be made for one car that is also used for personal purposes, as long as the personal use is separated out and costs associated with it are not claimed.
If the business has more than one car that is also used privately, no deduction at all is allowed for the second car and the entity must nominate the car for which it wants to claim the deductions. The choice cannot be varied for as long as the entity holds the car.
