Starting a Business and Employing Spouse (tax benefit or successful business)

[intotherealworld]

If I earn 100k and my spouse earns 0, can I register an ABN and start a business, then employee her (for appropriate services) for 50k per year?

I figure if the business earns more money than her income then that's great, we've just started a successful business.

But if the business doesn't, then it will be a tax deduction for me and overall we will pay less tax.

Am I missing something? It seems like a win-win?

[mjr]

You cannot claim the following deductions against your PSI:

• payments to your spouse, or other associate, for support work such as secretarial duties

https://www.ato.gov.au/Business/Personal-services-income/What-to-do-when-the-PSI-rules-apply/Sole-trader/

[intotherealworld]

Ah, I hadn't come across the Personal services income (PSI) rules.

Seems I was missing something and it's of course more complicated than I thought...

[marty998]

You also have to prove that you have a genuine enterprise, otherwise you can't claim "non-commercial losses".

You are then also subject to Part IVA which is the general anti-avoidance tax provision. If the dominant reason for your scheme is to generate tax savings then you can also be denied deductions.

[intotherealworld]

So I would need to start a genuine enterprise and employ my spouse for a reasonable wage for legitimate work (not secretarial duties).

To clarify, the main purpose of this is not to tax avoidance. The idea is to try start a successful small business. However it just seems like there is an appealing safety net, that if the business doesn't make money initially there will be tax benefits.

[mjr]

Form your business enterprise as a partnership instead of a sole proprietorship, then you can split the income without needing to employ her.

Just asking for trouble and close inspection from the ATO if your activities drift anywhere near tax minimisation in their opinion.