The Tax Office has issued a Taxpayer Alert warning individuals about arrangements purporting to divert personal services income to a self-managed superannuation fund (SMSF) to avoid paying tax at personal marginal rates.
As reported in Thomson Reuters Weekly Tax Bulletin – Issue 17 (29 April 2016), the ATO has identified arrangements whereby individuals perform services for a client but do not directly receive any money for the services. Rather, the client remits the consideration for the services to a company, trust or other non-individual entity. That entity then distributes the income to the individual’s SMSF, purportedly as a return on an investment in the entity. The SMSF treats the income as subject to concessional tax (15%) or as exempt income for funds in pension phase.
The Commissioner warns that such arrangements may be ineffective at alienating income such that it remains assessable income of the individual or personal services income. The amounts received by the SMSF may also constitute “non-arm’s length income” of the SMSF (taxable at 47%). The Tax Office said it is currently undertaking reviews of a number of cases involving such arrangements and will be engaging with those taxpayers over the coming months.
This latest Taxpayer Alert adds to a growing list of similar Tax Office warnings about various profit shifting arrangements involving SMSFs: see further Thomson Reuters Australian Superannuation Handbook 2015-16 (at [12 400]).