Tax Considerations for Direct Sellers
Seek professional advice
Direct sellers should seek professional advice from accountants or tax advisers on matters relating to the conduct of their business and taxation matters. The following information is designed as general information to assist direct sellers in understanding what some of the key matters are in relation to taxation.
Are you conducting a direct selling business?
There are differences in how tax applies depending on whether your direct selling activities are a “business” for tax purposes or not.
If they are you must account for the income from your direct selling business in your income tax return. However, if they do not meet the business tests you have no obligation to report these activities in your return.
Generally, most people undertake direct selling activities as a business opportunity, however there may be some whose direct selling activities do not meet the criteria of a “business” for tax purposes and could be considered as a hobby.
While there is no single rule that determines if you are in business for tax purposes, the following are indicators that you may be:
- You have made a decision to start a business and have done something about it such as registered a business name or got an ABN. Please refer to the section ABN before registering as you may be covered by the DSA exemption.
- You intend to make a profit or genuinely believe you will make a profit from the activity, even if you are unlikely to do so in the short term.
- You repeat similar types of activities.
- The size or scale of your activity consistent with other businesses in your industry.
- Your activity is planned, organised and carried on in a businesslike manner.
Under the PAYG withholding system, direct selling organisations are required to withhold tax at the highest marginal rate on commission payments to direct sellers unless the direct seller provides an ABN. In recognition of the practical difficulties this presents for the substantial number of ISPs who generate a small amount of commission, an exemption exists for companies who are Members of DSA. Under the terms of the current exemption, DSA Members are exempt from withholding requirements for payments up to a maximum of $15,000 per direct seller per year. Once an individual exceeds this level of earning, they should register for an ABN and provide it to their direct selling organization or withholding will occur. For ISP’s who company is not a member of the DSA tax may be withheld or you may be asked to provide further documentation.
Getting an ABN is free and can make running your business easier in the future, particularly if you have to register for other taxes. For example, if you need to register for GST now or in the future, you’ll need an ABN first.
Please refer to the following ebook for more information on ABN requirements. To download this ebook click here.
There are differences between wholesale and agency models
How you report and pay tax (especially GST) are affected by whether your direct selling organisation interacts with you through a wholesale or agency model.
In a wholesale model, you buy products from a direct selling organisation and resell them to customers. In this case you will earn income from your direct selling business in the form of retail profits on the sales you make to your customers, and bonuses on the sales of the independent distributors in your downline.
In an agency model, you are an agent for the direct selling organisation and sell products on their behalf. In this case you will earn income from your direct selling business in the form of the commissions on the sales you arrange with customers, and the bonus and/or override commissions earned on the sales of the direct sellers in your downline.
The income you derive from your direct selling business may be subject to income tax depending on the threshold amount you earn from all your income sources.
You must have a Tax File Number (TFN) regardless of the type of business you’re starting. If you plan on running your business as a sole trader, you can keep your individual TFN. If you’re operating as a partnership, company or trust, you’ll need to register a separate TFN for the business.
If you have established a downline in a country other than Australia and you earn income from that country you should seek professional advice on how to account for that income in Australia for tax purposes.
If your direct sales business activities result in a loss for the year, the loss will be treated in a special way for tax purposes. The loss may be an allowable deduction in the year in which the loss is incurred, or in a subsequent year and you should seek professional advice to deal with this properly.
Commissions and bonuses are classified for income tax purposes, as “personal services income”, and in ordinary circumstances, would need to be accounted for by the direct seller. However, DSA has obtained a special ruling from the ATO that allows the accounting of this to be done by the direct selling organisation. The direct selling organisation is required by the ATO to keep records of the GST paid on bonuses and commissions to each direct seller in the form of a “recipient created tax invoice” and issue this to the direct seller as evidence of income.
A direct seller must register with the ATO for GST if your gross business income from sales (excluding any GST) is more than $75,000 per year, or is projected to be so. GST registration is optional for direct sellers whose business has a GST turnover under $75,000.
Direct sellers whose businesses are registered for GST must remit GST on their taxable supplies, but can also claim input tax credits for GST paid to their suppliers for business related acquisitions. Businesses that choose not to register are not required to remit GST on their sales, but are also not entitled to claim input tax credits for GST paid to their suppliers.
In a wholesale model, if you are registered for GST purposes and purchase product in the course of your direct selling business for resale and not personal use, then you will be entitled to claim the GST on the wholesale price back as an input tax credit, but will also have a GST liability on the re-sale of the product. If you are not registered for GST, there is no input tax credit entitlement and the GST on the wholesale sale is effectively borne by you.
In an agency model the direct selling organisation is fully responsible for GST on product sales as legally the sale transaction is made between the direct selling organisation and the consumer.
In relation to commissions and bonuses paid to direct sellers, in general such payments are subject to GST (unless they are paid in relation to products acquired for your own or your family’s use). If a direct seller is registered for GST then the direct selling organisation would normally add the 10% GST to the amount of the commission or bonus payable to the direct seller who would then be required to remit this amount to the ATO.
Deducting business expenses
If you are “in business” then you are able to deduct expenses incurred in operating your direct selling business. Care should be taken to ensure that you only deduct those items or proportion of items that relate to the conduct of your business and professional advice is recommended.
Costs may include:
- The cost of products acquired for resale to customers (if you operate under a wholesale model).
- Stationery, postage, wrapping
- Freight and handling charges paid to the direct selling organisation and any delivery costs to your customers
- Business calls and a proportion of phone plan and internet costs
- Free gifts given to your customers, such as hostess gifts that you have purchased
- The cost of goods purchased for demonstration purposes
- A proportion of costs for the use of an office or home office
- The cost of items of office equipment or depreciation of the cost of equipment
- Business software and training aids
- Motor vehicle expenses and some other travel expenses
- Some expenses related to the business proportion of any seminars and meetings
You must be able to substantiate every item of expense claimed in your income tax return. In most cases this will be done by means of invoices, receipts, dockets etc. For small items where a receipt is not always obtained, a notation or record of the expense is acceptable.