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  • General anti-avoidance rules and PSI

    This information is relevant to you if both of the following apply:

    • you receive personal services income (PSI) through your company, partnership or trust
    • the PSI rules do not apply to your income because you're carrying on a personal services business (PSB).

    The PSI rules were introduced to prevent the shifting or splitting of income with other individuals or entities in an attempt to pay less tax. This strategy is known as the alienation of PSI.

    Alienation of PSI occurs when the services of an individual are provided through a business entity (company, partnership or trust) rather than directly by the individual who performs the services.

    Alienation occurs when personal services income received is retained by the entity and/or diverted to associates, allowing a lower rate of tax to be paid on that income. The use of these arrangements is also used by some taxpayers to create an entitlement to a range of deductions which wouldn't be available to an individual providing the same services as an employee.

    If you have arrangements where your PSI is alienated and is taxed at a lower rate than if you had received the income yourself, you may attract the general anti-avoidance rules (GAAR).

    On this page:

    How the GAAR apply

    The general anti-avoidance rules (GAAR) will only apply if the dominant purpose of your arrangement is to obtain a tax benefit. For example, if you use a company or trust to retain profits from PSI in your business or split PSI with an associate which reduces your overall income tax liability.

    However, if you're operating as a company or trust, you can pay remuneration (for example, salary or wages) to yourself or an associate for work related to the earning of your PSI, if it is equal to the value of their services.

    In most cases, a salary equal to the value of your services will be the gross amount received by your business for your services less allowable deductions (other than deductions associated with income splitting). If the remuneration is less than the market value for the services provided, then the arrangement may attract the GAAR.

    Example: How the GAAR apply

    John receives a salary which is paid to him as a principal worker of his company Smith Pty Ltd. His salary is not equal to the value of the services he provides and the remaining income is distributed to his wife and brother who provide administration assistance.

    The GAAR may apply to the arrangement Smith Pty Ltd has in place, as John may be obtaining a tax benefit from splitting the income with his associates.

    End of example

    Companies, partnerships and trusts

    Take the following steps to prevent the GAAR potentially applying to your situation if you are a PSB that is a company, partnership or trust.

    Companies

    If you operate a PSB through a company and there is no income splitting and profits are not retained in the company then the GAAR will generally not apply. 

    If a genuine attempt is made to break-even, a relatively small amount of taxable income may be paid to you by the company, provided that income is distributed to you via a franked dividend in the following year.

    Partnerships

    If you have a PSB with your spouse through a genuine partnership, in which you both share equally in profits and losses, and are jointly liable for debts and obligations, the GAAR will not apply where income is divided equally, even if one spouse is the main generator of the income.

    Trusts

    If you operate a PSB through a trust with a corporate trustee, the conditions are the same as for companies.

    You should receive income from the trust in relation to the PSI that is commensurate with your services, or be the sole beneficiary of the trust in relation to that income.

    See also:

      Last modified: 30 Mar 2017QC 17216