The ATO is reviewing arrangements where individuals (at or approaching retirement age) purport to divert personal services income (PSI) to a self managed superannuation fund (SMSF) to minimise or avoid income tax obligations, as described in Taxpayer Alert TA 2016/6 Diverting personal services income to self managed superannuation funds.
Taxpayers who have entered into a similar arrangement are encouraged to contact the ATO so it can help resolve any issues in a timely manner and minimise the impact on the individual and the fund. Where individuals and trustees come forward to work with the ATO on resolving issues, it anticipates that in most cases the PSI distributed to the SMSF by the non-individual entity would be taxed to the individual at their marginal tax rate.
The ATO will address issues affecting SMSFs on a case-by-case basis, but it will take individuals' cooperation into account when determining final outcomes. Individuals and trustees who are not currently subject to ATO compliance action and who come forward before 31 January 2017 will have administrative penalties remitted in full. However, shortfall interest charges will still apply.
The ATO can be contacted by email at: SMSFStrategicCampaigns@ato.gov.au
(with "TA 2016/6" in the subject line).
On 29 April 2016, the ATO issued Taxpayer Alert TA 2016/6 to warn individuals about arrangements purporting to divert PSI to an SMSF to avoid paying tax at personal marginal rates.
Arrangements of concern
The ATO said it is reviewing arrangements whereby individuals (typically SMSF members at or approaching retirement age) perform services for a client but do not directly receive any (or adequate) consideration for the services. Rather, the client remits the consideration for the services to a company, trust or other non-individual entity (including an unrelated third party). 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 current pension income.
Other variations of the arrangement include the income being remitted by the entity to the SMSF via a written or an oral agreement between the entity and SMSF, instead of as a return on an investment. The SMSF may also record the income from multiple entities or through a chain of entities. Alternatively, the entity may distribute the income to more than one SMSF of which the individual or associates are members.
The Commissioner considers that the arrangements may be ineffective at alienating income such that it remains the assessable income of the individual under s 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or PSI. The ATO also warns that Pt IVA may apply.
The amounts received by the SMSF may also constitute non-arm's length income of the SMSF under s 295-550 of ITAA 1997, and therefore be taxable at 47%. Other compliance issues include:
Source: ATO, Taxpayer Alert TA 2016/6, 29 April 2016, https://www.ato.gov.au/law/view/document?DocID=TPA/TA20166/NAT/ATO/00001.
- that the amounts received by the SMSF may be a contribution and generate excess contributions tax consequences for the individual; and
- superannuation regulatory issues – the arrangement may breach the sole purpose test under s 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). Such breaches of the SIS Act may lead to the SMSF being made non-complying or to the disqualification of an individual as a trustee.