Many IT contractors and independent developers believe their tax situation is straightforward — until an ATO review, a missed BAS, or an unexpected tax bill reveals otherwise. Whether you are a developer, engineer, consultant or IT freelancer, this guide addresses the specific tax issues most relevant to your situation.
You Have One Client — Can You Still Use a Company?
This is the most common question we receive from IT contractors, and the answer is nuanced.
If most of your income comes from one client and is derived from your personal skills — coding, architecture, consulting — the ATO may classify it as Personal Services Income (PSI). PSI rules can restrict your ability to:
However, PSI rules do not mean a company is useless. Even under PSI, a company may still provide liability protection, credibility, and certain structuring benefits. The key is getting the assessment right before you decide.
- Split income with a spouse or family member through a company
- Claim certain business deductions a typical company could claim
- Retain profits in the company at the lower company tax rate
The PSI Tests Explained (Simplified)
Results Test: >75% of income from one contract/client — PSI likely applies
80% Test: >80% from one entity — PSI likely applies
Unrelated Clients Test, Employment Test, Business Premises Test — each can remove the income from PSI treatment
One contractor cleared PSI by maintaining 3+ clients in a financial year — structure matters
Do I Need an ABN?
If you invoice clients, operate under a contract, and are not on a company payroll — yes, you need an ABN. Operating without one is a compliance risk, and clients may be required to withhold 47% of your payment (top marginal rate) if you cannot provide a valid ABN.
Overseas Clients and GST — Do I Still Register?
This is a common source of confusion. The rules are:
- If your annual turnover exceeds $75,000, GST registration is compulsory — regardless of where your clients are based
- Services provided to overseas clients are often GST-free as Exported Services
- You still need to register, lodge BAS, and correctly report zero-rated supplies
The Overseas Client GST Misconception
Many contractors assume 'my clients are overseas so I don't need to register.' This is incorrect.
Even with zero-rated (GST-free) overseas services, registration is required once the threshold is met.
Lodging BAS with incorrectly reported overseas income is one of the most common IT contractor compliance errors.
What Expenses Can I Claim?
The key points are below:
- Laptop, monitors, peripherals and home office setup
- Software subscriptions — IDE licences, AWS, GitHub, Azure, productivity tools
- Internet and phone bill — business portion
- Professional development, courses, certifications (ATO-compliant, directly relevant to income)
- Home office expenses using ATO's fixed rate or actual cost method
- Professional indemnity insurance
- Accounting and tax agent fees
- 100% of phone/internet if partly personal use
- Expenses without records — software purchases without invoices, cash transactions
- Commuting to a primary place of work (not deductible)
Should You Switch to a Company?
A company structure may benefit you if:
The 25% company tax rate versus personal rates of up to 47% can represent a meaningful saving — but only when structured correctly. The wrong setup can trigger PSI restrictions, PAYG implications, and unnecessary ASIC compliance costs.
- You earn consistently high contracting income ($120,000+ per year)
- You have multiple clients (reducing PSI risk)
- You plan to reinvest profits into growing a consulting practice
- You want liability protection beyond what a Sole Trader offers
PAYG Withholding and Quarterly Instalments
Once your income tax liability exceeds a certain threshold, the ATO will require you to pay income tax in quarterly instalments (PAYG Instalments) rather than one lump sum at the end of the year. Planning for these quarterly amounts is essential for cash flow — a surprise $40,000 tax bill in October is avoidable with the right setup.
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.
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