Navigating PSI rules and Part IVA – ATO finalises compliance approach

Personal services businesses must remain aware of other tax obligations, such as steering clear of tax avoidance schemes. Find out what this means for you.

The ATO has released a compliance guideline that deals with income that your business earns. Specifically, this guidance relates to income that comes from personal exertion and services. As you self-assess your income as a personal services business (PSB), this may require further analysis going forward to ensure your arrangements are not subject to high-risk audits.

Personal services income rules

The PSI rules are in place to deny you an opportunity to divert income to an associate of yours that pays a lower average rate of income tax. If the PSI rules apply to you, there are also limitations on the types of tax deductions you can claim.

However, in your circumstances, you have been declaring yourself as a PSB. This allows you to operate as a standard business, generally earning income through your trust/company.

Tax avoidance schemes

The finalised guideline highlights situations where individuals in your industry use a PSB to gain a tax benefit by distributing income that an individual earns through personal services to another person or company that does not undertake those services.

Overall, the ATO argues that the sole reason for doing this is to obtain a tax benefit, such as the individual’s income getting the tax-free threshold twice. An example of this would be a non-working spouse getting a dividend where tax is paid at the lowest marginal rate of 16%.

Next steps

In order to make sure you are fully compliant with your tax obligations, we would like to have a deeper look at the type of work you complete, as well as go through the contracts you sign.

This will help us advise you on the best way you can distribute income made by your PSB in a manner which the commensurate with the services provided by the principals in your business.

Please give us a call to arrange a follow up meeting, where we can discuss this further.