Digital marketing and creative agency owners typically focus on growth, client acquisition and campaign performance — and that is exactly as it should be. But the tax and compliance issues that emerge as you scale are some of the most serious — and most frequently misunderstood — in the business landscape. This guide covers the questions we hear most often from agency owners, including some that do not come up until they are already a problem.
Are Your Contractors Actually Employees? This Could Cost You Significantly
This is the most significant compliance risk for agencies of any size. Many agency owners hire freelancers, pay per project, and reasonably assume they are engaging contractors. However, the ATO assesses the actual working relationship — not just the contract wording.
Indicators that a 'contractor' may actually be an employee:
- They work exclusively or predominantly for your agency
- You direct how, when and where they work
- They do not bear commercial or financial risk for their work
- They cannot subcontract or delegate the work
- You provide their tools and equipment
Sham Contracting: Consequences Are Severe
If a worker is deemed an employee, you may owe backdated Superannuation Guarantee contributions (currently 11.5%) plus interest and penalties.
Payroll tax obligations may also apply — particularly if your total wages and contractor payments exceed state thresholds.
The ATO has significantly increased compliance activity in this area. A proactive review of your contractor relationships now can prevent a very expensive problem later.
ABN — Yes, You Need One
Regardless of structure, every agency operating in Australia must hold an ABN. This applies from day one, even before your first invoice.
GST and the Cash Flow Trap Most Agencies Fall Into
Most digital agencies exceed the $75,000 turnover threshold quickly. Once registered for GST, you collect 10% GST from clients on top of your fees — but this money is not yours. It belongs to the ATO and must be remitted when you lodge your BAS (quarterly or monthly).
The trap:
This is one of the most common reasons agencies hit cash flow crises. The solution is simple: maintain a separate GST holding account, or use a bookkeeping system that tracks GST liability in real time.
- Agency receives $110,000 invoice payment (including $10,000 GST)
- Pays contractors, runs expenses — treats the full $110,000 as revenue
- BAS quarter arrives: $10,000 GST is owed but has been spent
Income Tax — Why Your Bank Balance Is Not Your Profit
Agency income tax is calculated on your net profit, not your revenue. But understanding the difference between bank balance, revenue, GST liability and taxable profit is something many agency owners struggle with, especially in the early years. Without clean accounting, overpaying tax — or underpaying and receiving a penalty — is common.
Should You Operate Through a Company?
For most digital agencies, the answer is yes — particularly once you are scaling or employing people. Benefits include:
Note: Unlike IT contractors, agency income is less likely to be classified as PSI, because the business typically generates revenue from multiple clients and uses a team rather than solely the director's personal skills. This makes company tax planning more straightforward.
- 25% company tax rate vs up to 47% personal rate on profits
- Limited liability protection from business debts and legal risk
- More structured ability to retain earnings and reinvest
- Greater credibility with larger enterprise clients
What Can You Deduct?
The key points are below:
- Contractor and freelancer payments (with correct documentation)
- Employee wages and superannuation
- Software subscriptions — Adobe, Canva, Monday, Notion, HubSpot, reporting tools
- Advertising and client acquisition costs
- Office rent or home office expenses
- Client entertainment (subject to FBT rules — limited deductibility)
- Professional development and training for staff
- Accounting, legal and professional services
General information only
This article provides general tax information only and does not constitute personal tax, legal, or financial advice. Tax rules can change and individual circumstances vary.
If you would like advice based on your situation, please get in touch with the practice.
Contact the practice