Home – New Forums Money matters Can I pay myself as a contractor from my own company?

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  • #983418
    JO_2013
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    I am now the sole director/shareholder of a gardening/landscaping company. Before that I operated as a sole trader. I would prefer not to be classed as an employee of the company because I would rather not have to pay super & workers comp (I would rather put the money into my mortgage for now and I have private health insurance). The company does not have any other workers. So, can I as a sole trader with my own personal ABN invoice my company for my services, and thus not have to pay any super or workers comp insurance? Are there any issues with this? The company owns all the tools and the car, and the public liability insurance is held by the company

    Thanks

    #1142210
    Jason@Plumsale
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    Definitely seek legal advise if you are going to do this.

    I know you don’t need workers comp if you are the director, well for QLD anyway. Your safest approach would be to pay yourself a minimum wage with super, then pay the rest as a dividend. No super is payable on dividend payments.

    Otherwise why not just trade as a Sole Trader.

    #1142211
    JO_2013
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    In Victoria directors need workers comp if the payments exceed $7500 in the year

    My understanding of dividends is limited but doesn’t the company first need to retain profits in a financial year and pay 30% tax on those profits before distributing them as dividends to shareholders?

    I’m not earning enough yet that it’s better for the company to keep the profits. I will be taxed less at my marginal rate.

    I went with a company structure because its viewed as more professional… Some places won’t work with a sole trader. Also my personal assets are protected.

    I don’t see why I shouldn’t be allowed to do it this way – the ATO will get the same amount of tax from me and my company either way…

    #1142212
    easypeas
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    JO_2013, post: 162618 wrote:
    I am now the sole director/shareholder of a gardening/landscaping company. Before that I operated as a sole trader. I would prefer not to be classed as an employee of the company because I would rather not have to pay super & workers comp (I would rather put the money into my mortgage for now and I have private health insurance). The company does not have any other workers. So, can I as a sole trader with my own personal ABN invoice my company for my services, and thus not have to pay any super or workers comp insurance? Are there any issues with this? The company owns all the tools and the car, and the public liability insurance is held by the company

    Thanks

    I know of a few people that have been operating their small companies in the same way for some time.

    #1142213
    JacquiPryor
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    Hi Jo

    Read up at the ATO site – http://www.ato.gov.au/content/00326451.htm on whether legally speaking you would actually be considered an employee or a contractor.. .Simply invoicing your company and providing the ABN to them does not actually make you a contractor in the eyes of the ATO believe it or not.

    Given you are the director and this is your company, a brief look over their list of what defines you as an employee would generally apply I would think.

    I hope the above link helps.

    #1142214
    DavidThomas
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    You should really be asking your accountant this question, the advice you will receive via flying solo will be varied so its always best to get a professional’s help. You don’t want to have the ATO looking at you..

    Anyway, above said, IMHO setting yourself up as an employee, withhold tax and pay super and you should be ok. If you want more flexibility, talk to your accountant about using a Trust then you can distribute without Super..

    #1142215
    JO_2013
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    easypeas, post: 162657 wrote:
    I know of a few people that have been operating their small companies in the same way for some time.

    Good to know I wouldn’t be the only one doing this!

    Jacqui – thanks for the link. I used the ATO’s employee/contractor decision tool. The results were interesting…

    ‘Landscaping’ falls under the construction/building industry, and for that work I end up being classified as an employee

    For ‘gardening’ however, which is not under the building/construction umbrella, I end up being classified as a contractor. I think the key thing there is that technically I (not my company) could pay someone else to do the work for me… even though I never have and probably never will…

    So perhaps I will just invoice my company for the gardening work then. And take directors fees of only 450 a month for the landscaping work which is small enough not to have to pay super on.

    Seems quite convoluted

    As I said though, I don’t see why it wouldn’t be OK. I am not cheating the ATO out of any money. The company pays GST, I won’t, but any work I do will be invoiced through the company so the ATO is not missing out on anything there… And my personal taxes would be the same of course. Really the only difference is whether or not I am paying super and worker’s comp. Which really is no skin off anyone else’s nose.

    #1142216
    Marc D
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    JO_2013, post: 162680 wrote:
    Good to know I wouldn’t be the only one doing this!

    While circumstances vary, its mostly illegal. Just because people are doing it does not necessarily make it the right thing to do. I will go out on a limb and state that what you want to do is probably illegal as for all intents and purposes you would be classed as an employee of the company. Who does it hurt? well you are avoiding your compensation and super payments and you will be understating payroll and possibly avoiding payroll taxes. So it hurts everyone indirectly.

    If you pay yourself a low wage and you get hurt at work, then that’s your income for worker’s comp purposes so its not a good idea either in my humble opinion

    Mostly what I see with companies is that the owner draws $xxx amount of dollars a week and it is classified as a Directors Loan. At the end of the year, when the tax is done, a dividend is declared and used to pay out the loan that has accumulated through the year or it becomes a Div 7A Loan with its own set of difficulties.

    Whatever it is you need to see an accountant. If you think you have just come up with an original way of getting round the system, or want to hang out in grey areas, you can pretty well bet the tax department thought of it first. There’s better and easier ways of doing it, you just need some good, individual, tailored advice

    Cheers

    Marc

    #1142217
    JacquiPryor
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    Hi again Jo,

    As David mentioned – it might be worth chatting with your accountant to set up as a trust… you could effectively still have the same company in operation (as the Trustee for that new Trust) – but you might find some further perks that help in this situation – and, may also help protect your personal assets a step further than simply having the Pty Ltd company does. Whilst it may only be you that ultimately is ‘hurt’ by this scenario (missed super etc) – the government doesn’t want you, as a worker in Australia to be ‘hurt’… so, even though it’s your company and your own finances at the end of the day, the laws are still the laws. A company is considered a legal entity in its own right, so even though its your company the company could still get in trouble if it doesn’t comply, so, better to be 100% sure in moving forwards I think…

    All the best.

    #1142218
    James Millar
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    This seems very simple. Just take your preferred level of income as dividends from the company. As you are the sole shareholder there are no complications in having to pay dividends to others. There is no need to complicate this with subcontracts and all the compliance risks that come with it.

    Yes it’s generally preferred to pay franked dividends (with a 30% tax credit) rather than unfranked. All you need to do is get the timing right on access to the franking credits. This is normally only a problem in the first year of profitable trading because the franking credits are not normally available until the year after that (when the company tax is paid). You can contend with the franking credit timing issue in two different ways

    1. Have a debit loan at the end of the first profitable year of trading and clear that loan in the year immediately after with a franked dividend. Provided the dividend is paid before the due date of that income tax return then this is acceptable within the bounds of the Div 7A company debit loan regulations. The franking credits will be available in this subsequent year.

    2. Alternatively the company can incur Franking Deficit Tax (because it paid a franked dividend before it had sufficient franking credits) and then access the Franking Deficit Tax Offset if it’s the first year of tax liability – generally the case for newly profitable companies with no franking credits in year 1.

    Option 1 is the easiest. Simple.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
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