17 June 2002
Draft Taxation Ruling Number TR 2002/D5
Income Tax: Deductions that relate to personal services income
Available on ATO website at http://law.ato.gov.au/atolaw/view.htm?locid=’DTR/TR2002D5/NAT/ATO/ftF5’&PiT=20030201000001
A briefing note prepared by Independent Contractors of Australia
The tax debate of 2001 finally resolved the hotly debated issue of independent contractors’ rights to business-type tax treatment by the Australian Taxation Office. The outcome was the Personal Service Income (PSI) legislation. Rather than describing the deductions to which independent contractors are entitled, PSI describes the business-type deductions to which you are not entitled if you are caught by PSI.
The key understanding for independent contractors is that if you pass any of the business tax tests described in the PSI legislation, you are entitled to the business-type tax deductions otherwise denied to non-employees who fail the tests. The most important test is the ‘results test.’ Pass this test and you have entitlement to business tax treatment.
ICA has important information on how to pass the PSI tests on our Website. (Members section/Tax). Read first:
This Tax Ruling (TR2002/D5) is the ATO’s summary of the PSI legislation and explains how the ATO will apply and interpret the legislation.
2. Overview of TR2002/D5
This tax ruling describes the tax deductions that are not allowed for persons who are captured by the Personal Services Income (PSI) legislation. In other words, persons who fail the business status tests described in the PSI legislation are not running a business for Australian tax purposes and are denied the deductions listed in this tax ruling.
The ruling only applies to ‘non-employees’. PSI does not apply to ’employees’ because they are automatically denied business-tax status.
The ruling contains 149 detailed clauses over 38 pages.
3. The tests (Clause 12)
You are entitled to business tax deductions if you
1) Pass the ‘results’ test. (Pass this and this tax ruling does not apply to you.)
2) If you fail the results test, but pass the 80/20 test.
3) If you fail the results and 80/20 test, but pass one of (a) unrelated client test or (b) employ another person test or (c) separate business premises test
4) If you fail the results, and 80/20 and all of the 3 extra tests, but are given a Personal Services Business determination by the ATO.
4. Deductions allowed/disallowed
The following are the deductions
denied to persons who fail the PSI business tax tests
denied to employees
allowed as deductions for persons who pass the PSI business tax tests.[Note: Allowable deductions are subject to individual factual circumstances and the general anti-avoidance provisions of Part IVA of the Tax Act.]
Losses incurred in operating an enterprise. (Clause 30)
Rent, mortgage interest, rates or land tax on the individual’s residence. (Clauses 32-37)
Payments to an ‘associate’. (Clauses38-41) (Example at clause 124)
Superannuation paid on behalf of an ‘associate’. (Clauses 42-47) (Example at clauses 125-128)
The ruling makes comment on
Tax deductability for cars in private use. (Clauses 60-62)
Superannuation paid by the individual. (Clauses 63-65)
Salary and wages. (Clause 66)
5. Payment of dividends, retention of profit in a company and payment of tax at company rates
This ruling only makes a small comment on handling of company profits (Clause 104) probably because it does not need to make comment. If a person has passed the PSI tests and, as a consequence, is accepted as running a business for Australian tax purposes, their business falls within the normal tax rules applying to all businesses. ICA presumes that issues of retention of profit, company tax and dividends are not issues that need to be discussed by a PSI-related tax ruling, as PSI only has relevance to non-employees who do not have business-tax status.
6. Your Tax Return/s
When it comes time to submit your tax return, you should always seek the professional advice of an accountant or tax agent. ICA does not pretend to offer advice of this sort. Rather, this summary is designed to:
1) Alert you to the existence of this tax ruling.
2) Provide a lay person’s overview of this complex and difficult tax ruling.
ICA’s standard disclaimer applies to this briefing note, which should not be treated as professional advice but only as a guide to understanding the tax ruling.