ATO to crackdown on misuse of Personal Services Income

The Australian Taxation Office has issued a strong warning to accountants and clients who filed returns in 2010 under the Personal Services Income provisions, warning them of random audits.

Although the Personal Services Income regulations were introduced years ago, it seems a number of operators have found loopholes, which they are using to minimise their tax liability.

According to the ATO, income is a reward for, or the result of, an individual’s personal efforts or skills. It can therefore affect tax obligations for contractors and consultants.

You qualify as a personal services business if:

• You meet the results test, or
• Less than 80% of your personal services income in an income year comes from each client and you meet one of the other three personal services business tests (the unrelated clients test, employment test or business premises test), or
• You obtain a determination from the ATO determining that you are a personal services business.

“Even if your income is not affected… the general anti-avoidance provisions of Part IVA may still apply to schemes to reduce income tax by income splitting,” an ATO spokesperson says.

Sean Urquhart, a partner at Nexia Court & Co, says the ATO’s PSI crackdown could affect tens of thousands of operators.

“The legislation was introduced in the first place because individuals were resigning from paid employment on a Friday and turning up on the Monday morning to be re-hired as a registered company and thereby paying the company tax rate of 30 cents in the dollar,” Urquhart says.

“One way to avoid getting caught by the Personal Service legislation was to ensure that no one client provided more than 80% of your income, and that you passed one of three other tests – one being that you were required to have two or more unrelated clients.”

“Some operators started paying their family members as staff, to further minimise tax, and then moved profits into trusts rather than taking it as either salary or dividends.”

Urquhart says operators attempting to dodge the legislation may find themselves in trouble with the ATO, warning they could have breached the anti-avoidance rules.

The ATO has used its website to recommend to operators, who think they may have breached the legislation, to come forward or risk hefty penalties if an audit uncovers non-compliance.

“I would strongly suggest that anyone who has filed returns in 2010 under the Personal Services Income reviews what they have done and seeks assistance from their accountants,” Urquhart says.

“Now is the time to make a voluntary disclosure, otherwise the ATO will come down hard.”