Confusing tax return forms for the self-employed

For Australia's 2 million self-employed people, the tax return form is very confusing. It's full of tax double-speak and has a confusing layout. We've had complaints. Read this frustrated person's query and our attempt to assist. See if you can understand what's going on.

For quick reference

• Here's the story "I just want to fill it out correctly"
• Here's where you put your "income"
• An answer on, "Do the Personal Services Income Tax laws affect me?"
• ICA comment on the tax return form

"I just want to fill it out properly!"

Here's the query that prompted us to look at the tax return form more closely.

We received a query from a lady who works as a sole trader independent contractor through a labour hire firm. She doesn't have any complicated tax arrangements from what we gather. She simply wants to fill out her tax return without using an accountant---quite a reasonable request, we think.

When she looked at the tax form she became confused, particularly over 'personal services income'. We explained to her that as a sole trader the PSI laws are unlikely to apply to her. That is, she's not seeking to, and cannot split, her income and is not seeking tax deductions that any ordinary individual worker would not claim. Pretty straight forward really!

She sent us this email. [She's given approval for us to quote this but we are not identifying her]

Thanks for your reply but what you said is not how the tax pack explains it.

Income 1 is income earned from salary or wages shown of a PAYG payment summary - individual non-business or PAYG summary - foreign employment. The PAYG that you issued me is for business and personal services income so I am unable to complete this section.

So when I work through the tax pack I come to Income 9 which is in relation to Attributed personal services income. This has to be completed if you received a PAYG payment summary - business and personal services income (NAT 72545) showing an X against "Personal Services attributed income" or if you had personal services income attributed to you. This I assume has to relate to me as no other income sections are relevant.

Now in this case I have no X against "Personal Services attributed income" on my PAYG and it further states that if you provided personal services and payment was made to you as a sole trader you cannot complete Q9 in the Tax pack; you instead have to complete question 14 in Tax Pack 2010 supplement and complete item P1 in the Business and professional items schedule for individuals 2010.

So from the blueprint out sent out by you it states that my income is business income, it is not salary & wages income and that I am a sole trader. So this is where my question below has come from as in the Business and Professional Items Schedule I either earned income from personal services that I provided as a sole trader or from business both which relate to independent contractors under Labour Hire.

Hope that made sense as it is quite confusing to say the least. Next tax return I will get our accountant to do it for me but am not willing to fork out cash this time round when I am going to get so little in return.

Confused? Um, so were we. So we looked at the tax return form and found the following.

a) To understand what to do, a self-employed person needs to read the Tax Pack Supplement 2010. It's only 80 pages of close type---so what's hard about that?! But, ye,s we were a bit overwhelmed as well. After 1.5 hours of trying to sort out the Tax Pack we went to:

b) The ATO website, played around with it for about half an hour and found this: Filling out a paper return. It was really helpful. Our first task was to work out where to enter income. (It's not the same place as for employees from what we can gather.) We worked out that in the tax return form we needed to go to:

c) Item 9 "Attributed Personal Services Income". So, apparently when we are self-employed, we don't earn "income" but earn "attributed personal services income". Gee, that's nice and easy for the layperson to understand!

Here we discovered that if you are an individual sole trader providing 'personal services income' you do not put your income under item 9 but must go to item 14. The tax return says:

"If you provided personal services and payment was made to you as a sole trader, do not complete this item. You must answer Business and professional items schedule for individuals (NAT 2816)."

Wow, only two more documents to study before we can put our income into a box somewhere! To cut things short we went directly to:

d) Item 14. And found this in the Tax Supplement. BUT now we found that it's necessary to go to item 15. (Excuse me, but we're starting to fall asleep at this point and one of the kids has woken up and I need to read her a bedtime story!) Back from settling my young one, I read:

Did you receive income from personal services you provided?
Go to question 15. Read below.

Are you a sole trader?
Go to question 15.
Read below.

Your personal services income can include:
• personal services income under a pay as you go (PAYG) voluntary agreement
• personal services income from which an amount was withheld because you did not quote your Australian business number (ABN)
• personal services income from
  • working under a labour hire arrangement as an independent contractor

e) Alright, we're now at item 15, and we seem to have some success. It says:

Did you derive income or incur a loss from any business?
No	go to question 16 Deferred non-commercial business losses, or return to main menu Tax return for individuals instructions
Yes	Read below

This question covers:
• income or a loss from a primary production business
• income under a pay as you go (PAYG) voluntary agreement
• income from which an amount was withheld because you did not quote your Australian business number (ABN)
• income from which an amount was withheld because it was subject to foreign resident withholding
• income of an independent contractor working under a labour hire arrangement

It then says what you need to do!

You must show your net income or loss---gross business income less business deductions---at item 15, B for primary production and C for non-primary production on page 14 of your tax return.

Ahhh. We think we are there. If you are self-employed and working through a labour hire business you take your income as indicated on your PAYG summary supplied by the labour hire business and write it into the box at item 15 (we think!)

Now that wasn't so hard, was it?

But there's more! What about this personal services income stuff?

PSI laws

ICA comment on the tax return form