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Businesses providing personal services and Part IVA
Regarding the possible application of the general anti-avoidance rules in Part IVA to arrangements in which personal services income (PSI) is obtained through a personal services entity (PSE) operating a personal services business (PSB), the ATO has released a draft practical compliance guideline.
Because the entity is able to pass the PSI tests and be classed as a PSB, the PSI attribution requirements do not apply to taxpayers who generate PSI through an interposed entity (such as a company or trust).
The long-standing stance of the ATO is that, even in cases when the PSI tests can be passed, the net earnings resulting from the employment of a company or trust to create PSI should normally be taxed in the hands of the individual doing the work. There is a chance that Part IVA will apply to eliminate the tax benefit if any earnings are kept by the corporation or distributed to other related parties, resulting in lesser taxation on such profits.
The ATO’s classification of certain types of arrangements as “low-risk” and “higher-risk,” as well as instances of such arrangements, as outlined in the draft PCG. For instance, this arrangement would probably be low-risk and unlikely to be examined by the ATO if the entire PSI profit amount was given to the worker and they were taxed at their own marginal rate.
According to the ATO, agreements that pay related parties for administrative services done on behalf of the company—as long as the payments are reasonable—can still be categorised as low-risk. The ATO further notes that a low-risk arrangement can involve holding money in a corporation to enable the company to buy particular assets in the near future.
If an individual receives a tax benefit from the distribution of part of their net PSI profit to another company, and a lower overall tax rate is applied to this amount, the arrangement will be deemed higher-risk. The firm is run through a corporation that has a history of tax losses, and the entire net PSI profit for the current year isn’t handed out to the individual. This is an example of a scenario that would be considered higher-risk in the draft PCG. The ATO is more inclined to accept these riskier arrangements.
It is crucial to remember that just because an arrangement is categorised as a higher-risk scenario, it does not mean that Part IVA will automatically apply. All the draft PCG does is outline the circumstances that are more likely to be examined by the ATO if Part IVA is questioned.
Concerned about how the ATO’s draft guidelines on personal services income might impact your business? Don’t leave it to chance. We can help you navigate these complexities and assist with compliance, whether you’re managing PSI through a personal services entity or concerned about Part IVA risks.
Contact us today to help review your PSI situation and stay compliant with the latest regulations.
