Which to Choose – Pty, PAYG or Management Company?

By Kinexus on 18 August 2016
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You may have entered the world of contracting as it offers more flexible working arrangements, the opportunity to work on differing roles or a chance to travel and work in various locations, but are you aware you have choices in how you get paid and operate as a contractor?

A common question from our contractors is whether they should be Pty or PAYG, or use a Management Company. Whilst there are no hard and fast rules here are a few points to consider when selecting an option.
*Before we go any further, please note this does not constitute financial advice, and you should speak to your accountant/financial advisor to confirm the best choice for you!

PAYG
PAYG is an ideal option if you prefer to avoid the extra admin tasks that are associated with being a Pty Ltd contractor. This option shifts the responsibility for salary payments, pay advice, tax, HECs, super (inc salary sacrifice), annual payment certificates (group certificate) to your employer and you are usually also covered under your employers Workcover, Professional Indemnity (PI) and Public Liability (PL) Insurances.
PAYG is a great option for people who are time poor/hate admin and also don’t want to shell out for insurance cover. All it requires is the completion of a tax file declaration and a few personal details, and you are all set up and ready to go.

Pty Ltd
Pty Ltd setups can be more tax effective than PTY (as it opens access to the company tax rate of 30%), and it can allow some fringe benefits too, however setting up and operating a Pty Ltd company can be a time-consuming and costly process. By taking this route, you will need to:
• Set up a Pty Ltd company (usually via an accountant)
• Track and manage your GST, including submission of quarterly BAS statements
• Purchase Workers Compensation, Professional Indemnity and Public Liability insurances
• Manage your own Superannuation contributions
• Prepare statutory accounts and pay for associated costs

As a Pty Ltd contractor, you also need to be confident that your clients will be varied enough to pass the Alienation of Personal Services Income test. This test is to ensure that contractors are genuinely taking a variety of roles and not just working for one client over a sustained period (which might be the case if using a contract agency). Note this is a hard test to pass unless you plan to change agencies on a regular basis. Many Pty Ltd contractors are failing this rule.

If you are set on this route and think it is appropriate, then you will need to be prepared to provide proof of Workers Comp, PI/PL insurances, as well as company registration and ABN to your client or contract agency before commencing the contract.

Generally, the time and effort involved with Pty Ltd may not be worthwhile except for those in high salary roles or where some tax benefits might be recognised – check with your accountant on this.

Management Companies
Management companies are similar to Pty Ltd, except under this arrangement you have outsourced the management of the company to someone else, who then charge fees for this service (usually in the region of 5% of your annual earnings). Such management costs are usually considered tax deductible.

A management company set up can work if you are a highly paid contractor who wants to take advantage of any tax or financial benefits that Pty Ltd contracts may offer, but you want to reduce the admin time and possible risks inherent with managing a company yourself. To ensure you are getting ‘bang for your buck’, you should ensure that at a minimum, the following is provided by your management company within their fee:

To ensure you are getting ‘bang for your buck’, you should guarantee that at a minimum, the following is provided by your management company within their fee:
• Advice on efficient tax structures and overall tax advice
• Admin and other support
• Workers Compensation, Public Liability and Professional insurance cover

If you decide to go via this route, make sure you have confirmation and details of your Management Company to provide to your agency before you start work.

As you can see, the options are varied and must be considered carefully on an individual basis – best get on the phone to your accountant or advisor to work out which one will work for you.

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