30/05/2016

The Taxpayer Alert

The ATO released Taxpayer Alert 2016/6 in late April, sharing its concern about individuals attempting to divert personal services income to an SMSF.

The features of the arrangement generally are:

• a professional (the taxpayer) performs services for a client;
• the client does not pay the professional directly, instead they pay the professional’s fees to a company or trust, which may be related or unrelated to the professional;
• this trust or company then distributes the income to an SMSF (either as a return on investment or as per a written/oral agreement with the SMSF); and
• the income is taxed at the concessional rate of tax or treated as exempt current pension income of the SMSF.

This arrangement essentially results in the income of the taxpayer being concessionally taxed (either at 15% or 0%) instead of being taxed in the taxpayer’s hands (at their personal marginal rate).

The ATO deems that this scenario could have the following consequences (among others):

• the income received by the SMSF may constitute non-arm’s-length income (taxed at the highest marginal rate);
• the anti-avoidance rules may be triggered, that would deny the taxpayer the tax benefit of the arrangement;
• it may create superannuation compliance issues (e.g breach of the sole purpose test); and
• the income may be treated as a contribution to the SMSF, which could potentially result in excess contributions.

Does this impact service trust arrangements?

The above may be reminiscent of a service trust arrangement but are they the same?

A typical service trust arrangement is where one or more professionals carry on a business and enter into an agreement with a service entity (which is generally a trust or company controlled or owned by the professionals).  Under this agreement, the professionals pay fees and charges to the service entity in exchange for the services it provides (e.g. staff, clerical and administrative services).

This type of arrangement is commonly found in areas such as law, accounting or medicine and allows professionals to protect their assets from professional negligence actions or other claims.  

In our view, a service trust arrangement does not fall within the type of structure described in Taxpayer Alert 2016/6.   

This is because the professionals receive payment for their services from the clients but then pay fees out of that remuneration to the service entity in return for services, i.e. the service entity is being paid for the work it is doing as opposed to simply receiving money on behalf of the professional.

The remuneration is included in the professional’s assessable income but they may claim a tax deduction for the fees and charges as expenditures incurred in the conduct of the business.

One might wonder about salary sacrifice?

Once again we believe this to be a different scenario.

In order to be able to salary sacrifice, the taxpayer would need to be an employee. If they are an employee, they receive salary or wages, which do not constitute personal services income.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.