Chris the Contractor: A Tax Journey from Sole Trader to Company Director – 5 program video webinar series

Part 1: Is It Business or PSI? Chris’ Early Test

When Chris first started contracting in IT, the big question quickly arose: was he really running a business, or was his income caught by the PSI rules? This session uses Chris’s journey to show how the PSI tests work and why they matter. It covers:

• How Chris determined whether his contracting fees were PSI or business income, and why the distinction mattered
• The process for applying the PSI tests and deciding if he qualified as a personal services business
• Chris’s PAYG withholding and reporting obligations once PSI was identified
• The ATO’s current compliance approach (including PCG 2024/D2) and how the anti-avoidance rules come into play
• A case study from Chris’s first year: working almost entirely for one client, versus how the outcome changed once adding multiple clients

Part 2: Getting the Deductions Right – What Chris Can (and Can’t) Claim

Once Chris had worked out whether his income was PSI or business income, the next challenge was sorting through his expenses. From laptops to cloud subscriptions, what could he legitimately deduct, and what would land him in hot water with the ATO? It covers:

• The key tests Chris applied to determine whether his expenses were deductible, and the record-keeping requirements that followed
• Why the timing of when an expense is “incurred” was so important (TR 97/7)
• How Chris distinguished between capital and revenue expenses, and the consequences of getting this wrong
• Practical examples: laptop purchases, software licences, home office, travel to client sites, and professional subscriptions
• Deduction categories on the ATO’s radar, including repairs versus improvements and depreciating assets
• The limits when deductions create a loss, including the non-commercial loss rules
• Tricky deductions in Chris’s journey, including startup costs, interstate travel for projects, and equipment upgrades

Part 3: Small Biz, Big Benefits: Claiming the Right Tax Concessions

As Chris’s contracting career expanded, he moved from being a sole trader into company life, and suddenly the small business tax concessions became critical. Which concessions applied, which ones were worth using, and what traps did he need to avoid? This session covers:

• How Chris determined whether he qualified as a small business entity
• The small business income tax offset and the key return labels his accountant had to get right
• The simplified depreciation rules Chris considered for laptops, servers, and other equipment, and their pros and cons
• How Chris simplified his trading stock obligations when dealing with software and hardware sales alongside contracting
• The small business CGT concessions and their eligibility hurdles
• How the CGT small business restructure rollover offered Chris a pathway to change structures tax-effectively
• Practical examples highlighting both the benefits and pitfalls of relying on concessions

Part 4: How to Pay Yourself Without Paying for It Later

When Chris set up his company, one of his biggest questions was: how do I actually get money out? Salary? Dividends? A mix of both? And what about those extras, like the company paying for his mobile plan or interstate travel for conferences? This session covers:

• The options for withdrawing funds: salary, dividends, loans, and director drawings
• The types of withdrawals that triggered unwanted tax consequences in Chris’s case study
• How to approach family salary and wages to manage overall tax outcomes
• The risks of company loans to shareholders and how these set the stage for Division 7A
• Common scenarios where Chris could have inadvertently triggered FBT (mobile phone, laptop, car lease, conferences)
• The treatment of private expenses: loan account versus non-deductible add-backs

Part 5: Navigating Division 7A – Loans, Traps and Compliance

When Chris dipped into his company’s funds through loans and private expenses, he quickly discovered Division 7A and the web of compliance that comes with it. This session follows his experience to explain what Division 7A is, why it exists, and how to manage it in practice. It covers:

• How Chris tried to extract funds from his company tax-effectively, and how he accidentally triggered Division 7A issues
• The tell-tale signs that a Division 7A problem exists and what his accountant did to address it
• Why the “distributable surplus” concept was critical in measuring his exposure
• How to put Division 7A loans on a compliant footing and manage ongoing obligations
• The tax consequences of leaving Division 7A issues unaddressed
• How related trusts in Chris’s structure complicated the picture
• Common myths the ATO sees in Division 7A audits (QC 103680)
• Practical examples showing how easily Division 7A issues arise, and how to stay on top of them