80/20 Rule explained
The “Alienation of Personal Services Income Act 2000” or as its more commonly known the “80/20 rule” is specifically aimed at ensuring that the traditional contractor vehicle – a sole trader entity or single director ltd company is taxed at the same rate as a Pay As You Go, employee.
Additionally, the highest rate of personal tax is 47% (for earnings over 60k), there is a 10% Goods and Services Tax, 1.5-2.5% Medicare levies and compulsory Superannuation of 9%.
The evaluation of the 80/20 rule is quite complex:
– A personal services company cannot derive more than 80% of your earnings in one tax year from one END CLIENT (regardless of the agencies involved)
– Contracts should be structured as a reward for results, as opposed to purely payment for time and materials. This can be qualified in terms of risk. Does your contract expose you to risk? (i.e. if your contract guarantees you pay regardless of the outcome or quality of your work, you’ll fail this requirement)
– Contracts should take responsibility for the “rectification” of errors
– Some investment in equipment or tools (i.e. not purely using the end clients resources) is required Additionally the business should meet ONE of the following criteria: *
Unrelated Client: A personal services business must have multiple and unrelated clients. This negates intercompany invoicing and the use of investment income. *
Employee Test: A personal services business must employ people to deliver the service other than the principals *
Separate Business premises test: A personal services business is expected to have its own premises, not a home office or a serviced office. If you’d like more information about the 80 – 20 rule or a free assessment of whether you qualify, we’re always here to help.