Sub Contracting through a Company

[monoply]

Hi,

I have a friend, who is interested in setting up their own IT consulting company, and working for companies on a sub contract basis.

I think some in this forum do a similar thing, so I am looking for advice on the best structure, legally and tax wise, to set up to do this type of thing.

I think you need a company, with the shares in the company owned by a trust. But then others say that this type of structure is the same as been and individual, and they wont let you make use of the company tax rates.



Any help greatly appreciated, here or via PM.

Cheers
mono

 

[Mry]

It is not an easy thing to advise on, especially in a "fact-less" setting. Structure depends on costs vs benefits, size of business, desire for asset protection, family situation and legal risks.

I would recommend he speak to his accountant about these issues and cover areas such as personal services income issues as well.

The problem is some people may prefer a discretionary trust, but should we set up a super fund or a corporate beneficiary as well if the profits will be high or early retirement is on the cards? Is a company more appropriate should he wish to sell or introduce new partners later on? Is a unit trust more appropriate to distribute to a discretionary trust with losses or negatively geared investments? Are these all too costly and a partnership or sole trader structure be considered?

Advice on tax issues is easy to discuss, but applying them to a particular situation? Well, thats where personal contact with an accountant who knows you and your situation comes in useful.

 

[monoply]

Hi Mry,

Thanks for the reply. I know its not an easy question, and know that they will have to speak to an accountant at some stage.

Im just looking to get any advice and ideas I can from the forum, as I know there are some here who do this themselves, and also looking for recommendations of accountants they have used etc.

It all helps in the long run, with getting ideas, and knowing which way to head.

Im sure if they spoke to 5 different accountants, they would probably get 5 different types of advice.

Cheers
mono

 

[monoply]

Was there anyone else who could reply to this thread? Should I maybe try posting it in another area?

Cheers
mono

 

[DavidMc]

Hi Mono,

I'm an IT contractor. I use the services of another company to take care of all my invoicing, insurances, super, etc. They charge 3.5%. In effect I'm a regular employee hired by them and then charged out to my client. Over the long term it's more expensive than doing it myself but I really like the simplicity.

Your friend may also like to checkout www.brainbox.com.au. It's an IT contracting website with some good articles.


Cheers,

David.

 

[rumin]

domcc1,
The other company that takes care of all the invoicing, insurances, super, etc. .....is that only for IT contracting ?or are there similar companys that do the same thing(handle the grusome paperwork)for other contractors/freelance people??
Thanks

 

[DavidMc]

I'm not sure but I'd say so. I didn't want to give them some free advertising before but you can check out their website www.entitysolutions.com.au. I understand there are several companies offering this type of service (especially once all those tricks of being a contractor were wiped out).

 

[Apocalypse]

monoply

Although not in IT, I have this financial year started operating through a pty ltd company. One of the big issues is PSI - if your work is pretty much a result of exertion of effort on your own behalf it is PSI. If it's more than 80% for one person/employer/whatever you'll probably be classed as an employee by certain authorities, but not others. But I think operating as a company gets around this little bit. But due to PSI you may be limited on what you can legitimately claim as expenses - for example, if you are caught by PSI you can't claim for expenses paid to associates that are non-core business. Eg IT tech can't claim paying the wife for doing the books...which is effectively a method for streaming income and reducing tax. However, if you employed someone else to do IT stuff you would start to become more of a business structure and PSI may no longer apply.

Another thing is that under PSI you can't retain profits in the company - you HAVE tp pay them out promptly as wages, dividends whatever to the employee. So you can't take advantage of company tax rate.

So why did I do it. Moment of madness? It is certainly more complex than simply operating as sole trader. Apparently a trust with a corporate trustee may have been "better", but for me a simple sole director company was easiest.

I did it for

• asset protection: creates an interposed entity that will help protect personal assets. Note this is not the only element of it - ultimately the plan is to move PPOR into wife's name and other assets into trusts. Plus approriate insurance, etc etc.
• appropriate structure for future directions within the professional field. Anticipation of income being attain through business structure rather than PSI.
• financial benefits. Employing yourself through your own company creates opportunities where you can tax advantage of tax act curiosities - the old laptop "double-deduction", company cars, etc. You also have to pay yourself super and probably WorkCover levies too, but this may be viewed as either a benefit or not, depending on how you look at it. Note that the ATO consider operating through a company to gain employer super a valid reason for doing so - in case they want to argue tax avoidance (partIV-A?) In my case I my modelling shows little significant additional money in my pocket from my structure than if I operate as sole trader BUT on top of this I get super and I am covered under workers compensation.

All of this is as I recall it so the accuracy/terminology is no doubt variable, but hopefully this gives you some insight into the issues.