# Consulting



## VinOz (Jan 3, 2022)

Hi 

A couple of questions I'm hoping you can answer.
I'm an Australian citizen, relocated recently to Australia and about to do consulting work for US company (previously my employer when I was in the US).

My accountant suggested I set up a company (pty Ltd, with 1 director) Why can't I just be set up as a sole trader? It seems sole trader is less admin than swrting up a pty ltd company so why would my accountant suggest to set up pty ltd?

Also, is it a problem if US firm pays my consulting fees to an existing US bank account I had when I was working for them as an employee? If so, is there a best option for US firm to remit my consulting fees to my Australian bank account? Some banks such as CBA give a very bad rate when doing USD to AUD international transfer.

Thank you.


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## 255 (Sep 8, 2018)

@VinOz -- Hopefully @Moulard will jump in here, but there are advantages and disadvantages to both business structures. In general, Sole Trader status is easier/cheaper, but has zero liability/asset protection compared to a Pty Ltd. Sole Trader status is an extension of you personally, whereas a Pty Ltd is a totally separate entity, that has to file a totally separate income tax return. There is not enough information (numbers) in your post to make a recommendation, one way or the other. In answer to your specific questions:

"Why can't I just be set up as a sole trader?" Nothing that I know of should restrict you -- but you should definitely do some research to evaluate the pros and cons of each structure and plug in your "real world" numbers to see which would suit your specific situation.

"...so why would my accountant suggest to set up pty ltd?" A Pty Ltd will establish yourself as a real business and give you a modicum of both liability and asset protection. Depending on the numbers involved, a Pty Ltd may also give you a smaller tax bill. https://business.gov.au/planning/bu...fferences-between-a-sole-trader-and-a-company Of course there will be additional costs to run the corporate structure, including an additional set of income tax filings. The corporate structure may also give you some additional control of your earnings and many deductions that might be disallowed for a Sole Trader may be de rigor for a Pty Ltd (I'm not versed, at all, in the AU tax system.) 

"Also, is it a problem if US firm pays my consulting fees to an existing US bank account I had when I was working for them as an employee?" In general, when operating any business, it is advisable to run all income/expenses from a separate bank account. In the case of a Sole Trader, it is advisable, but not absolutely required (you would need to keep a separate tally of business/personal expenses.) If you become a Sole Trader in AU, you could certainly retain your current U.S. bank account and repurpose it for sole use of you as a Sole Trader, to make accounts "clean." If you form , as a Pty Ltd, you will absolutely be required to open new accounts in the company's name in the U.S., AU or elsewhere, to suit your needs. Cheers, 255


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## Moulard (Feb 3, 2017)

I have jumped in on the same question raised in the AU forum with some high level things to consider, but fundamentally 255 has it right.

One considerable point that I didn't think about earlier this morning are issues related to the fact that it sounds like you will be providing personal services to your US client, and that at least initially they will be your only client. (thanks 255 for raising the issue of deductions which tweaked out the following thoughts)

If your US client is your only client then you will also need to factor in the Oz rules on the Alienation of Personal Services Income and the general anti-avoidance rules (GAAR).

If you are not aware (and depending on how long you have been in the US, you may not be) Alienation of PSI occurs when the services of an individual are provided through a business entity (company, partnership or trust) rather than directly by the individual who performs the services. If you are effectively performing your old role as an employee under something other than an employment contract then the chances are extremely high that you will be caught up by this if your prior US employer is your only client.

Alienation occurs when personal services income received is retained by the entity and/or diverted to associates (think other family members to allow effective income splitting), allowing a lower rate of tax to be paid on that income. The use of these arrangements is also used by some taxpayers to create an entitlement to a range of deductions which wouldn't be available to an individual providing the same services as an employee. If you have arrangements where your PSI is alienated and is taxed at a lower rate than if you had received the income yourself, you may attract GAAR. This can reduce the tax benefits of setting up a Pty Ltd.

As mentioned in my other post, there are a number of other reasons that may well outweigh the tax considerations. Key amongst them are limits to liability (always a factor in law-suit happy US) that would protect your personal assets. Other professional indemnity and public liability insurance is often easier to get as a Pty Ltd then it is as a sole trader. Income Tax withholding and Super can be important depending on your financial planning abilities.

As I said I said in my other post, I always recommend going down the sole trader route at first because it is quick and easy to set up and is cheap. If the business is a success you can always convert to a Pty Ltd if and when it becomes the better solution for your business.

That said, you have employed an accountant, and therefore I would hope that you trust them to give you sound advice. Ask them to explain to you their thought processes on why they think Pty Ltd is better for your circumstance - only you can judge whether those factors are significant or important to you.


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## VinOz (Jan 3, 2022)

255 said:


> @VinOz -- Hopefully @Moulard will jump in here, but there are advantages and disadvantages to both business structures. In general, Sole Trader status is easier/cheaper, but has zero liability/asset protection compared to a Pty Ltd. Sole Trader status is an extension of you personally, whereas a Pty Ltd is a totally separate entity, that has to file a totally separate income tax return. There is not enough information (numbers) in your post to make a recommendation, one way or the other. In answer to your specific questions:
> 
> "Why can't I just be set up as a sole trader?" Nothing that I know of should restrict you -- but you should definitely do some research to evaluate the pros and cons of each structure and plug in your "real world" numbers to see which would suit your specific situation.
> 
> ...


Thank you so much for your input.


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## VinOz (Jan 3, 2022)

255 said:


> @VinOz -- Hopefully @Moulard will jump in here, but there are advantages and disadvantages to both business structures. In general, Sole Trader status is easier/cheaper, but has zero liability/asset protection compared to a Pty Ltd. Sole Trader status is an extension of you personally, whereas a Pty Ltd is a totally separate entity, that has to file a totally separate income tax return. There is not enough information (numbers) in your post to make a recommendation, one way or the other. In answer to your specific questions:
> 
> "Why can't I just be set up as a sole trader?" Nothing that I know of should restrict you -- but you should definitely do some research to evaluate the pros and cons of each structure and plug in your "real world" numbers to see which would suit your specific situation.
> 
> ...


Thank you!


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## VinOz (Jan 3, 2022)

Moulard said:


> I have jumped in on the same question raised in the AU forum with some high level things to consider, but fundamentally 255 has it right.
> 
> One considerable point that I didn't think about earlier this morning are issues related to the fact that it sounds like you will be providing personal services to your US client, and that at least initially they will be your only client. (thanks 255 for raising the issue of deductions which tweaked out the following thoughts)
> 
> ...


Thank you. Just to clarify further, if I set up as a sole trader with no employees (which I'm leaning towards for all the reasons highlighted) the US client will not have Super and oz withholding obligations, correct? I will have to do payg and personal super contributions will be at my discretion? Also, sole trader route would mean alienation of psi won't be an issue?

Thank you.


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## Moulard (Feb 3, 2017)

No, a US client would have no PAYG responsibilities- normally you would aside money to pay your income tax at the end of the financial year - usually, you will do this by paying quarterly Pay As You Go (PAYG) instalments

You would be responsible for your own personal Super contributions (which would come from your after-tax income). but would be considered non-preserved contributions.

PSI rules will still apply as your business as I presume that more than 50% of your income will be reward for personal effort and skills.

PSI deduction rules will basically limit your business deductions to those you could ordinarily make as an employee. So for example you would not be able to deduct things like rent, mortgage interest, rates or land tax, but you would be able to deduct home office type expenses within the limits for an individual tax return.

You can find more on PSI rules on the ATO website









Personal services income


Find out if you are receiving personal services income (PSI) and if the PSI rules apply to you.




www.ato.gov.au


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## VinOz (Jan 3, 2022)

Moulard said:


> No, a US client would have no PAYG responsibilities- normally you would aside money to pay your income tax at the end of the financial year - usually, you will do this by paying quarterly Pay As You Go (PAYG) instalments
> 
> You would be responsible for your own personal Super contributions (which would come from your after-tax income). but would be considered non-preserved contributions.
> 
> ...


Got it! Thanks very much!


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## VinOz (Jan 3, 2022)

VinOz said:


> Got it! Thanks very much!


Ok, just spoke to Accountant and they said as sole trader, us client will be responsible for super because I am effectively still an employee (I provide 100% services to US client)


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## Bevdeforges (Nov 16, 2007)

PMJIH, but that's one other "gotcha" you need to watch out for. Don't know about Australian law (but Moulard should know and has hinted at this above), but in many countries there is an issue if a "contractor" is working only for a single "client." Or if the single client exercises "control" over the contractor (in terms of where, when or how s/he does the work). 

If you only have a single client, you may be deemed to be an employee rather than a sole trader. I suspect that may be what the accountant is referring to.


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## VinOz (Jan 3, 2022)

Bevdeforges said:


> PMJIH, but that's one other "gotcha" you need to watch out for. Don't know about Australian law (but Moulard should know and has hinted at this above), but in many countries there is an issue if a "contractor" is working only for a single "client." Or if the single client exercises "control" over the contractor (in terms of where, when or how s/he does the work).
> 
> If you only have a single client, you may be deemed to be an employee rather than a sole trader. I suspect that may be what the accountant is referring to.


Yes, correct. that's what my accountant was trying to clarify for me today.


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## VinOz (Jan 3, 2022)

VinOz said:


> Yes, correct. that's what my accountant was trying to clarify for me today.


The accountant suggested setting up a ( pty ltd) company and consulting through that instead. Not sure how that would make it any different since the pty ltd will still only have 1 client.


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## Nononymous (Jul 12, 2011)

VinOz said:


> The accountant suggested setting up a ( pty ltd) company and consulting through that instead. Not sure how that would make it any different since the pty ltd will still only have 1 client.


With the caveat that I'm in Canada not Australia and know nothing of the latter, this is a common strategy. I'm a consultant working 100 percent for one company. They won't let me work for them directly as a sole proprietor (which I assume is the same as sole trader) because it's an employment relationship that creates various obligations for them (tax withholding, contributions to social insurance, benefits). My options are to either be employed by a staffing firm, who put me on payroll, make deductions, and take a small percentage as an administration fee; or to incorporate and set up a company (which I assume is the same as Pty Ltd) and have my earnings sent to a business account. I chose door number two. It cost me a few hundred to set up the company, plus a similar amount each year for reporting, but that more than pays for itself.

If you were a dual citizen who filed US tax returns, having a company would create additional reporting burdens, but fortunately you're not. (I am a dual citizen but I don't file US returns so this is not a concern for me.)

I find it hard to believe that your US employer would be held responsible for contributions to an Australian pension, but the local tax authorities might not be willing to grant you the tax benefits of sole proprietor status if you only work for a single client. Incorporation solves this problem.


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## VinOz (Jan 3, 2022)

Nononymous said:


> With the caveat that I'm in Canada not Australia and know nothing of the latter, this is a common strategy. I'm a consultant working 100 percent for one company. They won't let me work for them directly as a sole proprietor (which I assume is the same as sole trader) because it's an employment relationship that creates various obligations for them (tax withholding, contributions to social insurance, benefits). My options are to either be employed by a staffing firm, who put me on payroll, make deductions, and take a small percentage as an administration fee; or to incorporate and set up a company (which I assume is the same as Pty Ltd) and have my earnings sent to a business account. I chose door number two. It cost me a few hundred to set up the company, plus a similar amount each year for reporting, but that more than pays for itself.
> 
> If you were a dual citizen who filed US tax returns, having a company would create additional reporting burdens, but fortunately you're not. (I am a dual citizen but I don't file US returns so this is not a concern for me.)
> 
> I find it hard to believe that your US employer would be held responsible for contributions to an Australian pension, but the local tax authorities might not be willing to grant you the tax benefits of sole proprietor status if you only work for a single client. Incorporation solves this problem.


Are you able to claim home office deductions under your current arrangement (company)?


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## Moulard (Feb 3, 2017)

Bevdeforges said:


> Don't know about Australian law (but Moulard should know and has hinted at this above), but in many countries there is an issue if a "contractor" is working only for a single "client." Or if the single client exercises "control" over the contractor (in terms of where, when or how s/he does the work).


The contractor carve out in Australia is limited to personal services.

A carpenter who is a sole trader would be able to have one client, and only the labour portion of his income would be subject to PSI rules. A consultant doesn't "make" or "sell" anything other than their labour so its all personal services.

Basically at the height of the tech boom, companies were wanting to get employees off their books to avoid payroll taxes, and the employees were wanting to leverage the lower company tax rates or income split by "hiring" the spouse etc. (Australia does not have joint returns) - PSI rules were put in place to significantly curtail the use of sole trading arrangements for white collar workers.



VinOz said:


> The accountant suggested setting up a ( pty ltd) company and consulting through that instead. Not sure how that would make it any different since the pty ltd will still only have 1 client.


The PSI and GAAR rules will still apply and limit what your business can deduct...
However the critical difference is that you will do your own income tax withholding and pay yourself employer contributions into your super, register for GST etc)

Thinking on this overnight, if you don't want the effort of managing a Pty Ltd there are management companies out there that will put you on their books and do all that all the tax compliance stuff for you. They typically take a percentage cut of your invoices. 



Nononymous said:


> I find it hard to believe that your US employer would be held responsible for contributions to an Australian pension,


Well the view of the ATO is that if you have an employee in Australia then you meet permanent establishment rules and thus are liable for compliance with Australian employment tax rules including Withholding, Super, Payroll taxes if they will be working in Oz for more than 3 months.

Of course it is hard for the ATO to enforce that if the company has no legal presence in Australia, but that is a separate matter.


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## Nononymous (Jul 12, 2011)

VinOz said:


> Are you able to claim home office deductions under your current arrangement (company)?


Yes, but in Canada I can claim very extensive home office deductions as a sole proprietor (trader) as well. 

This may not be useful to you, but what I've done to simplify accounting is have the company act purely as a pass-through. Let's say I do $10,000 worth of work; a month later the client pays the company $10,500 - my invoice plus 5% for the Canadian version of VAT. The company pays the full amount to myself as a sole proprietor. I set aside the GST and pay installments every quarter, as the sole proprietor. At tax time the company has zero income or assets, and for my personal tax return I declare that income as a sole proprietor and take all the home office deductions. Not sure if this is entirely kosher but the government gets the same money in the end and my tax returns are very simple. My accountant in-law figures nobody will care.

Again, this is Canada. Australia may behave differently.


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## 255 (Sep 8, 2018)

@VinOz -- Your question: "Are you able to claim home office deductions under your current arrangement (company)?" This might help: Deductions for home-based business expenses . Cheers, 255


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## VinOz (Jan 3, 2022)

Anyone with experience completing Form W-8BEN-E?
Does an Australian Pty Ltd doing accounting work in US check the box Passive NFFE or Active NFFE?


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## Moulard (Feb 3, 2017)

I have no experience completing a Form W-8BEN-E but I can provide you some guidance.

Short answer: Active NFFE.

Long answer: If less than 50% of your business' income derives from passive sources (think dividends, interest, income equivalent to interest, annuities, rents, royalties etc) then it is an Active NFFE.


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## VinOz (Jan 3, 2022)

Thank you.

For those Aussies who have had to set up a pty ltd and open a company bank account in Australia, how do your US clients remit consulting fees that you invoice in usd to your Australian business bank account what? Does anyone use transfer wise and if so how does it work in the scenario above?

thanks again!


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## Bevdeforges (Nov 16, 2007)

We've had a few folks on various forums here who have set up a Wise business account to receive their "foreign" (including US based) remittances. Haven't seen any complaints so far.


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