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Should your business bring in investors?

Sometimes the difference between a good business and a great business is simply having sufficient capital to execute your business plan. For many businesses, the owners have put everything they have into growing the business but there is still a gap. Business Investors offer an opportunity to close that gap but at what cost?

How do you know you need investors?

Unfortunately, most businesses seek investment funding at the point it is most critical or for the wrong reasons – seeking funding for a business when it is in financial distress is always going to be hard. Neediness is never a good negotiating position or very attractive. And, few will be prepared to invest to save you.

Funding from investors is used to fund growth where a major investment is required – where the business cannot service its growth or capital requirements and these requirements are greater than what the business can fund on its own.

On most occasions, investment is needed to build out scale and take advantage of the potential of the business.  In many cases the owners can only afford to fund a portion of what is required but the scale they need will make the difference between an okay business and a great business.

What will investors expect?

Before seeking investors you need to get your house in order.

Every business operator knows that they should have a business plan in place. Most don’t. With a strategic business plan, you can track performance and growth, departures from the plan, etc., and this management information will tell you the point at which you need investment – either debt or another form.

A strategic business plan will also inject reality into blue sky entrepreneurialism and flush out many of the issues that investors will inevitably question. It will shore up the business case and demonstrate that the growth path anticipated has been sufficiently thought through – a big issue for many entrepreneurs.

This planning stage is important because there are more ideas chasing capital than there is capital chasing ideas.  You have one chance to pitch to investors and often you are competing with a range of unrelated or different opportunities.

Investment types

Investment can be debt or equity investment. A debt investment is paid back in some form. There are many ways to structure debt investment from traditional interest payments to profit sharing.

Equity investment however is what most people think of when they think of investors. Equity investment is where the injection of capital buys equity in the business and often a degree of management participation or control. There are many ways of structuring these arrangements depending on the motivation of the parties involved – everything from a direct injection of cash to the provision of essential infrastructure and knowledge.

Investor types

The most common investor for SMEs is family or friends investing out of loyalty and often a belief in the skill set of the business operators. The key problem with family and friends as investors is that often the details of the investment are loose. Trust is high and everyone has a belief, at the beginning, that the other party will act in their best interest. If family and friends are investing, you must put in place the same level of formality to the arrangement as if strangers were investing. It prevents confusion and upset.

Another reason for a high degree of formality is that on some occasions, the person looking to unwind or exit the arrangement in the future will not be the person who entered into it. It’s important to ensure that the exit provisions are clear in case someone dies.

Commercial investors come in many forms – angel investors, venture capitalists, private equity, or investment by associated parties. At the SME end of the market, angel and venture capitalists dominate.

Angel investors tend to operate at investment levels between $100k and $500k. Angels are generally individuals looking to for a great idea from a start up that they can capitalise on.

Private equity investors are at the other end of the scale and look to invest tens of millions – generally with established businesses reaching for another level and expectations of high growth. Private equity generally look for a compound internal rate of return on capital in excess of 30%.  They look for high returns and an identified exit timeline. They want confidence in return on capital and ultimately, return of capital.

In general, commercial investors will seek a regimented approach – shareholders agreement, restrictions around what can be done without their consent, and a clear exit path. This is not an area you should approach without expert advice.

Some things to look out for:

  • Insufficient formality around the agreement – misunderstandings and boardroom battles over direction take the focus off achieving growth
  • The wrong structure at the beginning – a bad deal won’t get better
  • Exit clauses – look at what the deal looks like at the end of the investment not just at the beginning
  • Not being able to fulfil the stated plan – be certain about what you’re offering
  • What are you giving away? Often business owners are so keen to secure the investment they forget about what they are giving away.
  • Control and how much the investor can achieve over time and the influence they have – you don’t want to be voted out of your own company once it’s successful
  • The level of management control and influence exerted – infighting and debates about direction will only take the focus off the big picture

If your business requires the aid of business investors, contact the professionals at Impact Accounting today.


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It’s almost impossible to predict what the local and global economic environment has in store for us in 2015.  The ‘who knows’ factor is adding to uncertainty and in general, business is not ramping up for growth but maintaining a ‘steady as she goes’ approach – meaning low investment and jobs growth.

The Reserve Bank of Australia (RBA) meets again in early February with economists torn on whether interest rates will fall at that point.  Previously, the Reserve Bank Governor stated that inflation was an impediment to cutting interest rates.

But back when he said this, the RBA was looking at a crude oil price of USD $86 (Brent crude), compared to current levels of around $50.  For Australians, other than a general enthusiasm about filling up for around $1 a litre, oil prices have had a dramatic impact on inflation.

The latest figures released late January put inflation at 1.7% – well below the RBAs target of between 2% and 3%.  The markets have already factored in an 80% chance of an interest rate cut in 2015; it’s just a question of when.

In January, the Australian dollar slipped to its lowest point since July 2009 falling to under USD $0.80.  This financial year, the dollar reached its highest point at USD $0.93 in early September 2014 and its lowest in late January 2015 with a difference between the two of just over 16%.

On top of that, commodity prices have dropped dramatically by around 20% and unemployment is edging up.

So, we have a low interest environment with a falling Australian dollar and stilted economic growth – Australian growth levels have been below trend for over 6 years and are likely to continue that way.  The question is, what now?


The last Federal Budget contained a series of severe cuts.  Some of those have passed Parliament and become law while others are pending the outcome of negotiations with the minor parties, while others have died a slow and protracted death.  Keeping track of what announcements are now law is difficult.

Here’s a quick summary:

  • Carbon Tax – abolished.
  • Mining Tax – abolished along with the associated business initiatives such as the loss carry back rules, accelerated depreciation for motor vehicles and the instant asset write off.
  • Superannuation guarantee (SG) – rephased as part of the mining tax repeal. Now, the SG rate will remain at 9.5% until 1 July 2021.
  • School kids bonus – was to be abolished as part of the mining tax repeal but is now means tested until 31 December 2016, before being abolished.
  • 2% Debt tax – applies between 1 July 2014 until 30 June 2017 to those with annual taxable incomes over $180,000 (high income earners). In line with the debt tax, FBT rates will also increase from 47% to 49% from 1 April 2015 until 31 March 2017.
  • Biannual indexing of fuel excise – introduced by stealth as a tariff proposal.

There are a series of other announced reforms that have either been rejected or stalled in the Senate.  These include Family Tax Benefit reform, the $7 fee for GP visits, an increase in the pension age to 70, the 6 month wait for unemployment benefits, and deregulation of University fees.  The Coalition’s paid parental leave scheme also seems to have faded from view.

The problem for the Government is that national debt is increasing – the mid year economic review revealed a $10.6bn blowout.  Falling commodity prices and sluggish growth mean that the deficit is not going to be plugged any time soon.

To bring debt under control, the Government needs to cut spending somewhere or increase taxes.  At this stage, it’s uncertain what and how this might be achieved.  Cutting spending will rely on amending legislation passing the Senate with agreement by the minor parties – something the Government has not been able to achieve to date.

On the tax front, the Government’s Tax White Paper is due out within weeks.  The much anticipated review of the tax system is reported to outline the need to change the current system’s reliance on personal and corporate taxes including broadening the base and increasing the rate of GST, and changing how superannuation is taxed.

However, an increase in the GST requires the agreement of the States and as a result, all parties involved will be savaged by voters for any increase.  If the Government acts on the reform measures set out in the Tax White Paper they have until mid 2016 to sell the concept to voters (according to the ABC’s Antony Green, the first possible date for a normal House and half-Senate election is 6 August 2016).

So, what does all this mean to you?


The key to survival and growth this year is constant monitoring and adjustment.  The environment we started with on 1 July 2014 is already quite different.  Keep an eye on top line growth as much as the growth of your bottom line.  Keep your focus on increasing your market not just cost cutting to make the numbers look right.

Importers need to look at the price impact of the fluctuating currency on profit margins.  Do you need to put your prices up or are there other strategies to mitigate the impact?  It is important to understand that anything that impacts on your margins will have a magnified impact on net profit.

If you are not already doing it and your business is impacted by currency fluctuations – and this could be as simple as having all your software licensed from US providers, explore hedging options to protect against further falls in the dollar.

If you are using debt, there are numerous products from offset accounts to local currency overdrafts.  But, don’t try to be a currency trader.  It’s unlikely you will win.  Business is tough enough without trying to make decisions in areas you are not experienced in.  Even the pros get it wrong.

Exporters also need to consider their pricing.  Can you hold your price and maintain margins or should you move your price to attract volume?  Price, volume and margin are critical to work through when the currency is volatile.

In general, if your business has debt, do your housekeeping and ensure you are getting the best available deal.  The financiers are hungry for business right now so if you have not had your debt mix reviewed in a while, now is the time.


A positive this year is the reform of excess contributions tax that is currently before Parliament.  If passed, the amendments will enable individuals the option of withdrawing contributions in excess of the non-concessional contributions cap and 85% of the earnings.

If you choose this option, no excess contributions tax will be payable and any related earnings will be taxed at your marginal tax rate.  That’s quite a difference to the current system that can apply a tax of up to 93%.  And, the changes apply retrospectively to excess contributions from the 2013/2014 financial year.

For those with SMSFs, make sure your fund is acting within the rules.  There is too much money tied up in SMSFs for the Tax Commissioner to take a gentle approach to non-compliance.  Key issues include borrowings, unlawful interactions with related parties, overseas members and maintaining the residency of your fund, and ensuring that where pensions are being paid, they meet the maximum and minimum requirements.  Plus, if your SMSF auditor has flagged issues with you, you must act to correct these.

There is talk of changes to the way superannuation is taxed and how and what funds can invest in, but there is no point reacting to these recommendations until there is more certainty about reform.


The impact of Government policy is likely to be the biggest issue for many individuals but at this stage, it is unclear how and when the Government will seek to recoup the deficit.  That leaves the regulators to try and plug the hole.  A key target is individuals with overseas sourced income – if this is you, you need to be absolutely certain about what income is taxable in Australia.

But what the Government and regulators are likely to do to us is nothing compared to what we’re doing to ourselves.  Figures released by the RBA in mid January show that credit card debt is sitting at $50.5bn with $33bn of that accruing interest.  Having credit card debt is never a good idea. It’s a short term lending option not a long term one.  Get rid of it.


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Owning A Business And Divorce

What it means to you (& your business)

Breaking up is hard to do.  Beyond the emotional and financial turmoil divorce creates, there are a number of issues that need to be resolved.

What happens when there is a family company

A recent ruling from the Australian Taxation Office (ATO) will create a tax burden for many divorcing couples that have assets tied up in a company.  Previously, when a company transferred assets or cash to one of the former spouses under a Family Court order, many people took the view that the transfer was not treated as a dividend and did not trigger tax.  However, in a ruling released on 30 July this year, the ATO confirms that any settlements paid out by a corporate entity are treated as income and taxed at the relevant spouse’s marginal tax rate.

If you are receiving assets from a corporate entity as part of a property settlement, it’s essential that you understand the tax implications prior to settlement or a sizeable chunk of the settlement could go to the ATO.

For business owners, outside of the tax and financial issues, it’s important to not lose focus on what’s important to keep the business running efficiently.

What happens to your superannuation in a divorce?

A spouse’s interest in superannuation is a marital asset and can be split as part of the breakdown agreement.  It’s important to be aware however that superannuation cannot be paid directly to a spouse unless the spouse is eligible to receive superannuation (they have met a condition of release) but it can be rolled over into the spouse’s fund until they are eligible to receive it.  Laws exist to prevent taxes such as Capital Gains Tax being triggered when superannuation assets are transferred.  This is particularly important where your superannuation fund holds property.

A Court order or Superannuation Agreement is required to give effect to the agreed split in the SMSF assets or to execute a rollover eligible for the CGT rollover concession.

If you have a SMSF and both spouses are members, it’s important to get advice to make sure that all of the appropriate administrative issues are taken care of.  Where a divorce is not amicable, it’s important to keep in mind that the SMSF trustee is required under law to act in the best interests of the fund and its beneficiaries.  Anything less and the fund members may seek compensation for loss or damage.

Can you protect both parties from divorce?

In a divorce, assets are split based on a multitude of factors such as earning capacity, maintenance of children, and the assets held pre marriage.  Many couples don’t go through their marriage with an equal view of how assets and income should be attributed until something goes wrong.  If there is a disparity between the income levels of each spouse, there are a lot of benefits to the household in general of evening out how income flows through to the family.  If your partner earns less than you, there is a very real financial benefit to topping up their super as superannuation has preferential tax rates.  The same goes for taxable income.  If you can even out income coming into the household, it spreads the tax burden. Good financial planning can make a difference.

For professional advice concerning Business Ownership and Divorce, speak to the team at Impact Accounting today.

The Top SMSF Property Investment Mistakes

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SMSF Property Investment Mistakes

Former Prime Minister Paul Keating recently suggested that Self Managed Superannuation Funds (SMSF) should be restricted from investing in residential property.

Mr Keating told the Financial Review, “If I was treasurer today, I would be looking very hard at the whole entitlement or availability of debt to SMSFs. They have gearing  available to them and, of course, many of them are taking the option of buying residential property.”

According to the latest Australian Taxation Office (ATO) SMSF statistics, real residential property represents 3.5% of the value of all assets held in SMSFs.  This level of investment has been consistent since 2009 with the bulk of properties worth between $200,000 and $1 million.  SMSF investment in commercial property is around 12%. However, what has changed is the number of investors with an average of 1,200 new investors using their SMSFs to purchase residential property each year.  And, the explosion in limited recourse borrowing arrangements which have increased 1758% between June 2009 and June 2014.

For many SMSFs however, there are some very big risks if the borrowing arrangements and property purchases are not put in place correctly.  If your SMSF property investment breaches its compliance obligations, it is at risk of being deemed non-compliant and losing its concessional tax status and the SMSF trustees also risk being fined personally under the ATO’s new penalty powers that came into effect on 1 July 2014.

Here are the top SMSF property investment issues:

Liquidity, diversification and cashflow.  The Superannuation Industry (Supervision) Act (SIS Act) requires trustees to take heed of these elements when making any investment. When an SMSF invests in real property, there is a risk that the trustees are putting all of the fund’s ‘investment eggs’ in one basket and the rate of return will not be enough to meet the fund’s obligations.

Funds in, or entering, pension phase need to meet the minimum pension drawdown requirements.  The question is, will the rental yield meet the ongoing expenses of the fund including pension payments?  Funds are required to increase the minimum pension drawdown over time: 4% at age 64, and 6% at age 75.  That’s an increase of 50% in draw down obligations.  Will rent increase by 50% to keep pace?

But what if a member wants a lump sum and not a pension, where will the immediate cash come from? What about when a member dies?  How will the benefits be paid out from the fund? You can’t sell one room of an investment property.

Can my SMSF purchase my investment property?

A common question that often comes up is, can my SMSF buy a residential rental property, holiday home, or house from me or someone related to me?  The answer is no, not unless the property is business real property (a property used wholly and exclusively for business).  And, in most cases, residential property will not meet the requirements to be business real property.  It’s important to bear in mind that the penalty for breaching the related party investment rules is up to 12 months in jail.

Improving a SMSF property investment

If your SMSF has borrowed money to purchase a property, it cannot use any part of those borrowings to improve that property.  Also, a SMSF cannot borrow money to repair an asset it already owns outright.

However, a SMSF can use its own money to improve or repair a property acquired with borrowings, as long as the improvements do not result in the asset becoming a different asset.  For example, the trustees could not change a residential property into a childcare centre.  Or, turn a vacant block of land into an investment property.

Take the example of a SMSF that borrows to buy a residential house on a large block of land ripe for development.  The fund cannot subdivide the land and build another house because the borrowing rules prohibit a change in the character of an asset bought with borrowed money until the borrowings are extinguished. 

Getting the essentials wrong

The common problem areas for SMSF trustees are often simple things in the rush of the moment or simply poor structuring.

The most obvious example is when a property is purchased by an SMSF but the contract is in the name of the individuals.  Sometimes people just get carried away and make the purchase without thinking through the details.  Or, where there is a related entity involved like a unit trust but the unit trust was not established before the property was purchased or the incorrect name is inserted on the contract or registered with the titles office.

To avoid falling victim to SMSF property investment mistakes, speak to the professionals at Impact Accounting.

What happened to all of those Budget cutbacks?

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Budget Cutbacks

If you’re confused about what happened to all of those announced Budget cutbacks then you’re not alone.  Many of the Government’s initiatives are stalled in the Senate awaiting final negotiation.  Here’s a quick summary of where everything is up to:

What’s changed?

  • 2% debt tax on high income earners from 1 July 2014 (and FBT rate increase from 1 April 2015)
  • Superannuation guarantee rephased – now SG will remain at 9.5% until 1 July 2021
  • Mining tax repealed
  • The company loss carry back rules
  • The instant asset write off threshold of $6,500 for small business entities under the simplified depreciation rules
 has reduced back to $1,000 from 1 January 2014
  • The accelerated deduction of $5,000 for motor vehicles has been removed from 1 January 2014
  • Schoolkids bonus repeal – moved to 31 December 2016 and a means test applied until the repeal date
  • Low income superannuation contribution repeal delayed until the 2017/2018 financial year onwards
  • Income support bonus repeal delayed until 31 December 2016

What’s still up for debate?

  • Retirement age increase to 70
  • Changes to pension indexation
  • Tightening of access to family tax benefits
  • Removal of add-on family tax benefit for additional children
  • Cuts to R&D incentive
  • 6 month wait for employment benefits
  • Deregulation of University fees

The Treasurer has flagged that he will seek savings elsewhere – so watch this space.

Can INDIVIDUALS get a better tax deal?

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Reducing Taxes

Individuals have fewer choices when it comes to reducing taxes but there are still opportunities depending on your circumstances.  Salary and wage earners will have limited flexibility over direction of their income. Salary packaging can provide some tax benefits.  Beyond that however it will be more a matter of how you structure your other investments to help minimise tax and optimise your tax outcome. This applies at both an income and capital gains level. The use of trust structures, appropriate negative gearing, and maximising the benefits of franking credits can all assist in reducing your tax exposure.

Business owners and the self-employed have greater flexibility over how they receive their income and you should take advantage of this. Smart tax planning causes income to fall in the right places and maximises the use of lower marginal tax rates.

All of this requires some focus and attention early in the process.  Don’t wait until your tax liability is ‘hurting’ you. Take advice early and have a tax plan to ensure that your tax outcomes are as efficient as possible.

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.

If you are a business owner or self-employed and are seeking professional help reducing taxes, speak to the team at Impact Accounting today.

Can SMALLER BUSINESSES get a better tax deal? (Optimise Small Business Taxes)

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Small Business Taxes – Effective Structuring

So, can smaller businesses get a better tax deal? The answer is ‘sometimes’, but you need to be proactive.  Larger companies tend to spend more on advice to not only identify current opportunities but to understand the tax impact when acquiring new businesses, selling assets, structuring or restructuring.  We’ve seen many scenarios where businesses seek advice on tax issues once contracts have been signed – at the tidy up stage.  It’s too late at this stage to improve the tax position or unwind a problem.

Understand what’s available to you – concessions exist for small business entities and other entities if you know where to look. Often business just doesn’t have the time or feel the need to invest to explore anything beyond the compliance basics.

When it comes to small business taxes, getting your structure right is paramount – a lot of companies fall into the trap of looking at their structure once they have achieved a certain level of growth or decide it’s time to make significant changes – like bringing in investors or selling part of the business.  By this time the cost of changing structure is prohibitive. If you put a structure in place at the start that creates flexibility and tax efficiency, yes it will cost a few more dollars but you will enjoy the tax benefits as you grow plus your structure will accommodate change as your business builds out.

Ensure that income and profits flow effectively – this is a follow on from structure. Once you have the right structure, you can optimise the tax efficiency of how income flows to you providing you plan this in advance.

For professional advice concerning small business taxes and effective structuring or restructuring solutions, contact the team at Impact Accounting today.


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Australian Business Taxes – Are Big Companies Paying Less Tax?

How you can fight back

Hauled in before a Senate enquiry, media mogul Kerry Packer famously said, “Of course I am minimising my tax. And if anybody in this country doesn’t minimise their tax, they want their heads read, because as a government, I can tell you you’re not spending it that well that we should be donating extra!”

The Tax Justice Network – Australia, recently created headlines when they released a report into the practices of the top 200 ASX listed entities ahead of the G20 summit.    The report revealed that:

  • Nearly 1/3 have an average effective tax rate of less than 10%
  • 57% have subsidiaries in tax havens or low taxing jurisdictions
  • 60% report debt levels in excess of 75% of equity.

What this equates to is that 29% of ASX listed entities have an effective average annual tax rate of 10% or less and 14%, including James Hardie, have an effective tax rate of 0%.

21st Century Fox has a reported 117 subsidiaries in tax havens or low taxing jurisdictions.  Responding to the headlines Mr Murdoch tweeted “NO tax avoidance by News, Fox or any Murdochs in Australia.  Courts ruled, so move on!”

Tax is like any other cost in your business.  It should be managed effectively so you don’t pay any more than you need to.

But here’s the problem, a company has to make a profit to pay company tax.  Coming out of the GFC where jobs were shed and investments shelved, it was a bit harder to do than the boom times – particularly if you weren’t in the resources or banking sectors whose buoyancy made Australia’s headline economic figures look a whole lot better than they felt for the rest of the economy.  Plus, if you are investing in and growing a business, this consumes profit.  Unless you look below the surface, the tax paid is an ineffective measure of the contribution a company makes.

So the question is, is it likely that the biggest companies are paying a lot less tax than the average Australian business?  The answer is yes, of course.  The reason is simple, tax is a local jurisdiction issue and international corporations have the capacity to look across the tax minimisation opportunities globally, not just locally.  As long as everyone operates within the local laws, they are not doing anything illegal by minimising tax.  Plus, Government’s often offer tax incentives for large entities to establish in their region for the stimulus and job opportunities they provide.

The issue for Government’s across the board is what happens when it’s no longer minimisation but evasion – transparency is one issue. The recent G20 endorsed a common reporting standard for the automatic exchange of information.  The new reporting standard will be introduced in Australia in 2017 with the first exchange a year later.

It’s a debate that is playing out globally and anyone with a business with international connections, should take the time to review their current position across different entities in different locations and ensure that they are not at risk of being drawn into a widening net.

Got international connections? How to avoid problems

Whether you’re in business or an individual taxpayer, if you have funds flowing between countries, the tax office is going to be interested in you.  For individuals, Project Do It provides an opportunity to voluntarily disclose unreported foreign income and assets before the tax office discovers them.

For business, trigger points include:

Excessive debt levels in Australia – The thin capitalisation rules place a limit on the level of interest and other debt deductions that can be claimed in Australia when Australian operations are heavily funded by debt rather than by equity.  Legislation recently passed by Parliament retrospectively tightens these rules further for entities with very large debt deductions ($2m and above).

Excessive costs paid by local subsidiaries. The Government is particularly concerned with arrangements where Australian entities transfer intellectual property to a low tax jurisdiction for a relatively small amount of money and then pay considerable sums for the use of those assets on an ongoing basis.  Large management fees paid by Australian entities are another trigger for the ATO.

Use of tax havens or low taxing jurisdictions.

For all matters concerning Australian Business Taxes liable for companies with overseas revenue streams, speak to the team at Impact Accounting today.

Why the ATO might think you are not in business

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Personal Services Income (PSI)

There are some businesses that the ATO do not really think should be taxed like a business.  Unfortunately, just having a company or other structure set up does not protect you.

If you earn income mostly from your own personal skill or effort, like many contractors – then you are in danger of the ATO preventing you from accessing the 30% company tax rate and deducting some business expenses.

So, how do you know if you are caught? If you are the person responsible for the income produced by your business, and it’s from your personal efforts – not the use of machinery or trucks, the sale of goods, etc., – then you might be earning personal services income (PSI). The ATO then applies a series of tests to work out if you should be taxed like a business or more like an employee – like whether you work to achieve a specific result or are paid an hourly rate, whether you have multiple clients or just one, if you have an apprentice, where you operate from, etc.

If you earn Personal Services Income and you pass all the tests to be taxed like a business, there are still a few catches.  For example, the ATO believes that when PSI is derived through a company or a trust, all of this income should generally be paid to the individual who performs the services as salary or as a distribution of profits.

For all matters concerning Personal Services Income, contact the team at Impact Accounting today.