Every Australian contractor faces the question: should I stay on PAYG or incorporate? The internet is full of simple calculators that promise to give you the answer. They're almost all wrong—or at least dangerously incomplete.
The PAYG vs PTY LTD decision is genuinely complex, and the right answer depends on factors that no simple calculator can capture.
The Calculation Is Harder Than It Looks
Simple comparisons typically show: at $X income, PTY LTD saves you $Y in tax. But this ignores:
Personal Services Income (PSI) Rules: If your income is primarily from your personal services (as opposed to a genuine business), many company tax benefits don't apply. The ATO is increasingly aggressive about PSI enforcement, and many contractors are incorrectly claiming company benefits.
Superannuation Complexity: Super contributions through a company have different rules than personal contributions. Contribution caps, timing, and tax treatment all change. Getting this wrong can mean unexpected tax bills.
The Exit Question: Money inside a company is not money in your pocket. Extracting it triggers tax events. Many PTY LTD advocates ignore the cost of eventually getting your money out.
Administrative Costs: Companies have real ongoing costs—accounting, compliance, ASIC fees, insurance requirements. These are often underestimated.
The PSI Problem
Personal Services Income rules are where most contractor calculations go wrong. The ATO defines PSI as income that is mainly a reward for your personal efforts or skills, and it applies specific tests:
Results Test: Are you paid to achieve a result, with risk if you fail to deliver?
Unrelated Clients Test: Do you have income from multiple unrelated clients?
Employment Test: Are your services performed independently of the client's business?
Business Premises Test: Do you maintain separate business premises?
If your income is PSI and you don't pass these tests, most company tax benefits are attributed back to you personally. This is the trap that catches many contractors who incorporate based on simple tax calculators.
The Real Decision Framework
The PAYG vs PTY LTD decision should consider:
Income Level and Stability: Higher, more stable income makes the company structure more attractive—but only if you pass PSI tests.
Asset Protection Needs: Company structures can provide liability protection (though not from personal negligence in professional services).
Business Aspirations: If you're genuinely building a business that will employ others or have value beyond your personal services, a company makes more sense.
Cash Flow Preferences: Companies offer more flexibility in timing income recognition, but this flexibility has costs.
Risk Tolerance: Getting it wrong means ATO penalties and back-taxes. If you're risk-averse, the PAYG path may be safer.
What Good Advice Looks Like
Proper advice on this decision requires:
- Genuine assessment of your PSI status
- Multi-year modelling that includes exit strategies
- Consideration of super contribution strategies
- Understanding of your specific professional requirements
- Honest assessment of administrative burden you're willing to carry
This is why we built Cnopy. Not another simple calculator, but a rigorous framework for understanding the decision in its full complexity. Built by people who've been contractors, advised contractors, and understand the gap between simple answers and good answers.
The PAYG vs PTY LTD decision is consequential. It deserves more than a spreadsheet.