Contractors, the tax office doesn’t always see you as running your own business. If you work as a contractor providing a service and you have an ABN, you may think that it means you are running your own business, but the tax office doesn’t always see things that way. There are various tests you need to pass in order to claim your deductions the same way that businesses can, otherwise your deductions are limited to that as if you were an employee, earning salary and wages.
If you are providing a service and you have an ABN, then you most likely need to pass what is called the Personal Services Income test rules, otherwise your work related deductions will be limited to that as if you were a salary and wage earner. That means, in general, you need to answer YES to all three questions below –
- Do you get paid only when you have completed specific tasks? (note if you get paid by the hour then you cannot answer yes to this question)
- Do you supply your own tools or equipment to do your job?
- Are you required to rectify defects in your work?
If you answer YES to all of the above, then you pass the PSI tests, and you will not have any restrictions on your business claims. If you do not answer yes to the above, then you need to go through a series of other tests which the tax office has set out if you still want to claim expenses like a normal business. The additional tests can be complicated and lengthy, so I won’t mention them today.
The Personal Services Income (PSI) rules tend to impact people who have one main client and who get paid by the hour. If this sounds like you then your business deductions are limited to that as if you were a salary and wage earner. This restricts claims relating to travel, asset depreciation and various other tax deductions. If you are someone who has many different clients, and you get paid upon completion of specific tasks, then you generally are not impacted by the PSI rules, so you can claim deductions like a normal business.
PSI needs to be looked at on a case by case basis, so you should always seek professional advice if you are unsure if you are impacted.