Structure to do some IT Contracting?

[mja]

Hi all,

I'm considering moving from a permanent salary to a contracting role in IT in the near future. (I feel fairly comfortable in the knowledge that none of my friends or family read Somersoft, so they'll still be in the dark until I let them know...heh).

I'm fairly certain that if I actually get a contracting job that I'll be in the highest income tax bracket to start off with.

Now, what are the pros and cons of actually setting up a Pty Ltd company and earning income through that versus actually earning the income in my own name? I assume that I'll be the sole director and shareholder (unless my wife wants to receive a dividend...)

Is it possible to earn money in the company for the fiscal year and then get paid a dividend as a sole shareholder at the end of the FY (or monthly/quaterly)? Is this a way around not having to pay 9% into a nominated super fund?

Can I still do ITWV if I only earn dividends rather than PAYG?

As far as I can see...

Pros:

* Can distribute income
* Some asset protection
* Vanity. I can say I'm a director of a company. ))

Cons:

* Can be complex
* Costs money to set up and administer each year

Any other opinions? Would love to hear any thoughts out there.

Cheers!

-- MJ.

 

[poppy]

Hi mja,

The ATO have stuff in place to catch out contractors using companies to pay less tax. I believe they call the money you earn "Personal Services Income" and therefore you have to declare it as your income regardless of the company, and it will be taxed at your marginal rate.

One other advantage of the company though is that you will probably not have to pay payroll tax whereas if you get paid direct through an agency you will probably have to pay payroll tax.

I am a contractor and get paid through a company but it is not my own company, I pay a fee to have someone manage my pay, pay my super, salary packaging etc and they provide the payroll tax exempt company at their own expense. I am basically a PAYG, all money I earn minus super, fees etc is paid to me. No problem having an ITWV in my situation.

If you salary package you might be able to avoid paying the 9% super on the salary packaged amount.

Edit: Forgot to mention, if you have your own company you have to provide your own insurances too.

 

[younginvestors]

Hi mja,

There are a few Contractor Management companies around that will for a fee (around 3%) allow you to submit your timesheet and they do everything else.

http://www.cxc.com.au/
http://www.entitysolutions.com.au/
http://www.contract1.com.au/

I use a similar structure to these management companies whereby I submit my timesheet, they take a commission, they split my income between my wife and I, pay our super (or not if we wish), pay us gross (I pay our tax each qtr). Our tax returns are included in the fee. It might cost me 3k-4k per year, but saves me about 13k in tax by allowing the split.

Best of all it takes no time of mine and I still get to claim all the deductions for work related expenses.

I've owned a Company in the past to trade through, and found it more trouble than it was worth keeping the necessary documentation, doing BAS returns etc.

I'm 'leveraging' a service to do something for me, for a fee.

Cheers,
YI

 

[pennyk]

Hi all,

Now, what are the pros and cons of actually setting up a Pty Ltd company and earning income through that versus actually earning the income in my own name? I assume that I'll be the sole director and shareholder (unless my wife wants to receive a dividend...)

Is it possible to earn money in the company for the fiscal year and then get paid a dividend as a sole shareholder at the end of the FY (or monthly/quaterly)? Is this a way around not having to pay 9% into a nominated super fund?

Can I still do ITWV if I only earn dividends rather than PAYG?

As far as I can see...

Pros:

* Can distribute income
* Some asset protection
* Vanity. I can say I'm a director of a company. ))

Cons:

* Can be complex
* Costs money to set up and administer each year

Any other opinions? Would love to hear any thoughts out there.

Cheers!

-- MJ.

My husband is also contracting, and we do it through a PtyLtd structure. We had the company structure anyway, so it was easier for us to use that.
You don't have to set up a company... you can work as a sole trader, but either way, you do need to have an ABN, get workers compensation insurance and professional indemnity insurance. We are not doing so much work at present, so we have the lowest level of workers comp, which costs $175 pa, (it is linked to the level of salaries in the company), professional indemnity was $2000 or so. Its better if you register for GST, even though you have to put in BAS statements. If you have a software program set up, and are diligent with entering invoices/ bills, it should take less than 15 minutes a quarter to prepare the statement.
Asset protection is now fairly minimal I think with a company structure. Laws have been changed, and directors can still be sued for company issues.
You can certainly distribute income. You can pay yourself whatever income you want. If you are negatively geared, then you need to get some financial advice about the optimum wage to pay yourself to maximise the benefits of the negative gearing.
Companies pay 30% tax, so the tax rate is better. I think its worthwhile having a separate account where you quarantine your tax payable, so that you don't get caught out at the end of the quarter.
If you have a simple structure, and keep your accounts up to date, then the acounting costs can be minimised. If you have a company, you need to pay ASIC each year for the privilege of being on their company database.
You also will need to get some advice regarding whether you get caught under the Personal services legislation..... This is basically designed to stop people being in a long term contract and minimising your tax. If you do 2 or 3 contracts with unrelated organisations within a year, you shouldn't have any problems. The other things you can do to avoid it is to use your own tools (ie your own laptop), and have your payment linked to specific outcomes. (ie you don' get paid unless you achieve them). But in reality, if you get caught by the legislation, the main impact is that you can't claim for car use to and from work. So, its fairly minimal anyway.
If you are paying yourself a salary, you should pay the 9% super. Its better to go along and do all these things than be fined at a later date for not doing it!
If you are hoping to buy any more IP's in the short term, it would be better to organise the loans before you go into the contracting, because you will probably have to go down the lo-doc route for the first 2 years of running the company.
I am still undecided whether the additional hourly rate of contracting compensates for the additional costs of contracting. I think once you factor in unpaid time between contracts, insurances, tax etc, and depending upon your current income level now, its probably not a lot better, except for the ability to be able to structure taxes differently through a company.

Good Luck! But make sure you get some professional advice before making the jump.

 

[pennyk]

Sorry, I knew there was some reason why you didn't do sole trader for contracting..... I'm not sure if this is still the case, but as a sole trader, I don't think you can take out workers insurance for yourself. Which can mean that some companies won't touch you as a contracter. You need to have the company structure for that.
Pen

 

[austini]

... I use a similar structure to these management companies whereby I submit my timesheet, they take a commission, they split my income between my wife ...

Hi YoungInvestor,

I have just started looking into the personal services area as my wife is considering doing consulting and/or contracting work.

I note that the contract mgmnt coy is income spitting to your wife. Am I correct in assuming that you are working for a variety of clients throughout the year etc. Otherwise I thought that the ATO rules make it very difficult nowadays to split income if your work is personal services "income" as opposed to a real "business".

Thanks - Gordon

 

[austini]

My husband is also contracting, and we do it through a PtyLtd structure. We had the company structure anyway, so it was easier for us to use that. ...

Hi Penny,

I have noticed that contractors often use a Company structure. I'm curious as to why this is preferred over a Discretionary Trust Structure with a Company Trustee. I would have thought that the Coy/Trust would provide better asset protection and other than a small extra cost to setup the accounting costs would be similar.

We already have a spare Coy/Trust structure that is not currently being used so we were initially thinking that this might be able to be used if my wife decides to do consulting and contracting work.

Of course we will be seeking professional advice but past experience has taught us that it is always wise for one to do a little research prior to seeing a professional.

Cheers - Gordon

 

[younginvestors]

I note that the contract mgmnt coy is income spitting to your wife. Am I correct in assuming that you are working for a variety of clients throughout the year etc. Otherwise I thought that the ATO rules make it very difficult nowadays to split income if your work is personal services "income" as opposed to a real "business".

Hi Gordon,

I have been working for the same client for several years now and I worked for the previous client for several years.

Think of the management company like a consultancy.

I get "distributions" from the management company, as does my wife, as do all the other contractors (and spouses).

The management company has therefore many sources of income (i.e. not just the one the ATO gets concerned about when you have your own Company). It then distributes that income across it's 'partners' (the other contractors).

When it came to getting our PPOR mortgage and IP loans it got very difficult to explain to some brokers/lenders this structure set up and how it operates - and I have in the past wondered if it would be easier to go back to PAYG - but $1k less tax to pay in my pocket won me over.

Hope this helps explain things....

 

[pennyk]

Hi Gordon,

The management company has therefore many sources of income (i.e. not just the one the ATO gets concerned about when you have your own Company). It then distributes that income across it's 'partners' (the other contractors).

Hope this helps explain things....

Hi,
When we had a full blown business, we had many streams of income, and the IT contracting side was only around 30% of turnover, but we were still warned that my husband was getting close to falling under the Personal Services threshold, because he had a long term contract with one company, and didn't meet other criteria, like having own tools etc. We have been told that they consider the turnover of each person who is working in that context. So, I still think you need to be careful, no matter what structure you set up.
Pen

 

[pennyk]

Hi Penny,

I have noticed that contractors often use a Company structure. I'm curious as to why this is preferred over a Discretionary Trust Structure with a Company Trustee. I would have thought that the Coy/Trust would provide better asset protection and other than a small extra cost to setup the accounting costs would be similar.

Cheers - Gordon

I know we discussed using trusts at the time, and our accountant advised us against it. But I can't remember why!
I think they were concerned about potential changes to govt policy, as well as something about the beneficiaries of the trust being able to get access to distributions even if you didn't want them to at that stage....... but it was well over 5 years ago now, so the memory is very hazy!!
Pen

 

[mja]

Hi all,

Thanks for your constructive comments.

I think I'll fail the personal services income test (80/20 rule), so I'll skip creating a company for now... it all sounds like too much work and complexity at this stage.

Penny: I've already exhausted my full-doc capacity, so it's lodoc from here on in... unless I switch from contracting to permanent salary after the initial 6 month contract...

Cheers,

-- MJ.