The ATO has announced that it is reviewing arrangements where members of an SMSF (typically at, or approaching, retirement age) purport to divert income earned from their personal services (that is, PSI) to their fund, which results in minimising or even avoiding tax altogether on that income.
The ATO says these arrangements typically display all or most of the following features:
- An individual performs services for a client, or an acquirer of the personal services (client), for which the individual does not directly receive any (or adequate) consideration for the services provided.
- The client does not pay or remit funds to the individual directly; rather the client remits the consideration for, or in respect of, the services provided by the individual to a company, trust or other non-individual entity (which may be an unrelated third party).
- The entity then distributes the income to an SMSF, of which the individual is a member, purportedly as a return on an “investment” of the SMSF in the entity.
- The trustee of the SMSF treats the income received as subject to a concessional rate of tax, or as exempt current pension income of the SMSF.
The ATO also points out that such arrangements may also include one or more of the following characteristics or variations:
- The income may be remitted by the entity to the SMSF via a written or oral agreement between them, instead of as a return on an investment in the entity.
- The SMSF may receive the income from more than one entity or through a chain of entities. Alternatively, the entity may distribute the income to more than one SMSF of which the individual and/or associates are members.
What are the ATO’s concerns?
The worry for the ATO is that in order to avoid paying tax at applicable personal marginal rates, individuals are entering into these arrangements in an attempt to divert PSI to an SMSF, where the income is concessionally taxed or treated as exempt current pension income.
The ATO says that it considers that:
- The arrangement may be ineffective at alienating income such that it remains the assessable income of the individual under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).
- The income may be included in the individual’s assessable income as personal services income under Part 2-42 of the ITAA 1997.
- The amounts received by the SMSF may constitute non-arm’s length income of the SMSF under section 295-550 of the ITAA 1997 such that the income is not eligible to be concessionally taxed and is not exempt current pension income.
Of course, the ATO considers that the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 may apply to cancel tax benefits obtained by the individual.
It says other compliance issues for arrangements of this type may include:
- the amounts received by the SMSF under the arrangement could instead be deemed to be a contribution to the fund, and subject to the contributions caps, and/or
- superannuation regulatory issues, in particular the SMSF is maintained for purposes other than those set out in section 62 of the Superannuation Industry (Supervision) Act 1993 (the sole purpose test), leading to the SMSF being made non-complying or the disqualification of an individual as a trustee.
What the ATO is doing about it
The ATO says it will be undertaking reviews of a number of cases involving arrangements of this type, and will be engaging with taxpayers whose affairs concern it in this regard where it becomes aware of this occurring.
For general information about the PSI regime refer to this ATO fact sheet. More information and essential details about PSI can be found in the November issue of The Taxpayer magazine. Tax & Super Australia members receive this magazine as a member benefit.
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