TA 2016/6: directing personal services income into an SMSF

The ATO has issued a Taxpayer Alert for arrangements involving personal services income being directed into an SMSF: TA 2016/6.

“We are currently reviewing arrangements where individuals (typically self-managed superannuation fund (SMSF) members at or approaching retirement age) purport to divert income earned from their personal services to a SMSF to minimise or avoid tax on their income,” says the alert.

TA 2016/6 describes arrangements where an individual performs services, but with the consideration for these services going to a company, trust or other type of entity. This entity then distributes the income to an SMSF, of which the individual is a member. The SMSF treats this money as investment income, subject to a concessional rate of tax or as Exempt Current Pension Income (ECPI).

“We are concerned that in order to avoid paying tax at their personal marginal rate these arrangements are being entered into by individuals in an attempt to divert their personal services income to an SMSF, where the income is concessionally taxed, or treated as exempt current pension income,” says the alert.

The ATO has a number of concerns with such arrangements – including that it “may be ineffective at alienating income such that it remains the assessable income of the individual under section 6-5”, “the income may be included in the individual’s assessable income as personal services income”, the money received by the SMSF may be Non-Arm’s Length Income, and the Part IVA anti-avoidance rules may apply.

The ATO also notes that such amounts received by an SMSF may be contributions and the arrangement could result in regulatory issues, “in particular” breaches of section 62 – the sole purpose test.

“We are currently undertaking reviews of a number of cases involving arrangements of this type and we will be engaging with taxpayers whose affairs concern us over the coming months,” says TA 2016/6.

“Taxpayers who plan to enter or have entered into this type of arrangement are encouraged to seek a private ruling or make a voluntary disclosure. They may also want to seek independent advice from an advisor not involved with the arrangement,” says the ATO.

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