The ATO's offer to remit penalties in relation to arrangements involving the diversion of personal services income (PSI) to self managed superannuation funds (SMSFs) has been extended from 31 January to 30 April 2017. 

Since April 2016, the ATO has been reviewing arrangements where individuals purport to divert PSI to an SMSF. The arrangements, described in Taxpayer Alert TA 2016/6, involve individuals (typically SMSF members at or approaching retirement age) who perform services for a client but do not directly receive any (or adequate) consideration for the services. Instead, 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 (including an unrelated third party). 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 oral agreement between the entity and the 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 is a member or the associates are members.

The ATO's view

The Commissioner considers that such 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 as PSI. The ATO also warns that the amounts received by the SMSF may constitute non-arm's length income of the SMSF under s 295-550 of ITAA 1997, meaning they would be taxable at 47%.

Other compliance issues include:

  • that an amount 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) 1993 (SIS Act). Such breaches of the SIS Act may lead to the SMSF being made non-complying or the individual being disqualified as a trustee.

Offer to remit penalties extended

The ATO has now extended the due date to contact it in relation to Taxpayer Alert TA 2016/6 from 31 January to 30 April 2017. With all the superannuation changes taking place, including the super reforms legislated in November 2016 and the review of non-arm's length limited recourse borrowing arrangements (LRBAs) due by 31 January 2017, the ATO has acknowledged that people may not have had sufficient time to consider its voluntary disclosure offer.

Individuals and trustees who are not currently subject to ATO compliance action, and who come forward before 30 April 2017 to notify the ATO about PSI diversion arrangements, will have administrative penalties remitted in full. However, shortfall interest charges will still apply.

In most cases where individuals and trustees come forward to work with the ATO to resolve issues, the ATO anticipates that the PSI distributed to the SMSF by the non-individual entity would be taxed to the individual at their marginal tax rate. The ATO says issues affecting SMSFs will be addressed on a case-by-case basis, but it will take individuals' cooperation into account when determining the final outcome.

The ATO can be emailed at: SMSFStrategicCampaigns@ato.gov.au, with "TA 2016/6" in the subject line.

Source: ATO, Diverting personal services income to SMSFs, 31 January 2017, https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/Diverting-personal-services-income-to-an-SMSF/;  Taxpayer Alert TA 2016/6, 29 April 2016, https://www.ato.gov.au/law/view.htm?DocID=TPA/TA20166/NAT/ATO/00001.