The predominant difference between a contractor and employee is the eligibility for tax deductibility.
As an employee, you will only be able to deduct expenditure(s) to the extent that it is directly related to earning income. This practically limits the availability of your income. Simple examples are educational expenses and stationery.
Some of the strategies and deductibility rules which are allowed and are often overlooked includes but are not limited to:
- Salary Sacrifice for fringe benefits. Salary sacrifice is not limited to an overall amount on a per annum basis but rather limited to an amount per employer. This is more so the case for health and medical practitioners.
- Income Protection Insurance
- Award Overtime Meal Allowances (applicable for certain professions)
Contractors / Self Employed / Service Providers will have more access to tax deductions as you are effectively running a business. The deductibility rules are vast where you will be entitled to claim deductions for any expenditure as long as it is in relation to your business.
Some of the strategies and deductibility rules that are permitted and are often overlooked includes but not limited to:
- Motor Vehicle
- Air Tickets and Accommodation for travel to conferences and seminars (there are no limit on this – Business Class and First Class air tickets are tax deductible)
- Professional Indemnity Insurance
- Interest for Line of Credit used to pay related business expenditure such as superannuation of PAYG Instalments
- Trust Structure
- Diversification of other income to tax-effective family members
- Tax rates can be potentially taxed at 30% income
- Access to future franking credits
- Reduction in salary and wages bill which could potentially trigger payroll taxes
- VIC threshold of $ 550,000.00 (taxed at 4.85%)
- NSW threshold of $ 750,000.00 (taxed at 5.45%)
In a live case study, we identified mis-management of taxation structuring and by re-structuring it legitimately, we were able to save the client in excess of $20,000 per financial year.