Tax Avoidance Laws

The Australian Taxation Office (ATO) announced recently that they will fund a number of test cases involving the splitting of Personal Services Income (PSI) and the issue of tax avoidance.

Personal Services Income is defined by the ATO as income earned by a taxpayer, either as an individual or through an entity, that is mainly as a result of personal efforts or skills, rather than from income-producing assets or a business structure.

For example, a transport company does not derive PSI due to the physical assets it employs to produce that income. Similarly, an entity such as a legal firm with a number of professional staff and the use of technical equipment does not derive PSI due to the business structure involved.

The ATO is focusing its attention on arrangements where PSI is earned through a company, trust or partnership and taxed at a lower rate (eg 30%) rather than a higher personal marginal rate that may apply (eg 45%). This may attract the tax avoidance rules, particularly if the amount paid to the main service provider is not an appropriate commercial rate.

In addition, the ATO will look at the use of trusts or companies that are used to split PSI with an associate, thereby reducing their income tax liability. For instance, if the salary paid to the principal worker of a trust or company is less than commercial and the remaining income is distributed to trust beneficiaries with lower tax rates, tax avoidance rules may apply.

The ATO is also looking at situations where PSI is split by making payments directly to an associated person or entity. However, where appropriate evidence is kept of work undertaken (eg time and pay book) which is chargeable to customers, the chances of getting into strife are minimised.

Please contact us if you are concerned about this issue to ensure that your business is appropriately structured.