The ATO is targeting individuals (at, or approaching, retirement age) purporting to divert personal services income to a SMSF to minimise or avoid income tax obligations.
A person earns personal services income (PSI) when 50 per cent of their income is earned from offering products or services that involve their skills, knowledge, expertise or efforts. Personal services legislation was initially introduced by the ATO to prevent unfair gain by diverting income. With the proliferation of SMSFs, particularly by small entities, diversion of income is now on the ATO’s target list.
The ATO is currently reviewing arrangements where individuals are diverting PSI to their SMSF. Under these arrangements, an individual performs services for a client and does not directly receive any, or adequate, remuneration for the services they provide. Instead, the client is instructed to pay fees or remuneration for the service provided by the individual to a company, trust or other nonindividual entity.
The relevant non-individual entity then distributes the income to a SMSF, of which the individual is a member, as a return on investment. These arrangements result in income that is either exempt from tax or taxed concessionally rather than being subject to tax at the individual’s marginal tax rate.
Arrangements that may also be included are ones where:
- the income may be remitted by the entity to the SMSF, instead of as a return on an investment in the entity
- the SMSF may receive the income from more multiple entities
The Tax Office has extended the due date for individuals to contact them in relation to these arrangements to 30 April 2017.
The ATO is encouraging SMSF trustees who have entered into an arrangement as described above or a similar arrangement to consider the voluntary disclosure offer to minimise the impact on the individual and the fund.
Issues affecting the SMSF will be addressed on a case-by-case basis, as the Tax Office recognises the importance of preserving the assets which SMSFs hold to fund retirement incomes.
SMSF trustees and individuals who come forward and are not currently subject to ATO compliance action will have administrative penalties remitted in full. Shortfall interest charges will still apply.
For more information, contact us at Leenane Templeton on 02 4926 2300 or email firstname.lastname@example.org