• Diverting personal services income to SMSFs

    We are currently reviewing arrangements where individuals (at, or approaching, retirement age) purport to divert personal services income to a self-managed superannuation fund (SMSF) to minimise or avoid income tax obligations as described in TA 2016/6 Diverting personal services income to self-managed superannuation funds.

    Under these arrangements, an individual performs services for a client. The individual does not directly receive any, or adequate, remuneration for the services they provide. Instead, the client is instructed to pay fees or remuneration for the service provided by the individual to a company, trust or other non-individual entity. The relevant non-individual entity then distributes the income to a SMSF, of which the individual is a member, as a return on investment. The purported outcome of the arrangement is that the income is either exempt from tax or taxed concessionally rather than being subject to tax at the individual’s marginal tax rate.

    The arrangements described in TA 2016/6 are highly complex with potential income tax and superannuation regulatory implications for the fund and the individual.

    How we can help

    The due date to contact us in relation to TA 2016/6 has been extended to 30 April 2017.

    We are aware there have been many superannuation changes since July 2016 including extensive superannuation reforms enacted in November 2016. SMSF trustees and advisors have been required to understand how those changes impact their funds and to address them. Further, SMSF's with limited recourse borrowing arrangements (LRBAs) may have been focussed on ensuring that their LRBAs are consistent with arm's length dealing (see ATO extends deadline for review of non-arm's length LRBAs for further information). As people may not have had sufficient time to consider the voluntary disclosure offer for personal services income, we have extended the opportunity to contact us without facing administrative penalties.

    If any of your clients have entered into an arrangement as described in TA 2016/6 or a similar arrangement, please contact us so we can work with your client to resolve any issues in a timely manner, and minimise the impact on the individual and the fund.

    We recognise the importance of preserving the assets which SMSFs hold to fund retirement incomes, so issues affecting the SMSF will be addressed on a case-by-case basis. We anticipate that, in most cases, the personal services income distributed to the SMSF by the non-individual entity would be taxed to the individual at their marginal tax rate.

    Individuals and trustees who are not currently subject to ATO compliance action, and who come forward will have administrative penalties remitted in full. However, shortfall interest charges still apply.

    Contact us

    Put ‘TA 2016/6’ in the subject line, include the SMSF trustee name(s), contact details and a time that is convenient for us to call you.

    SMSF advisors

    You should review your client base and consider available options. The due date to come forward is extended for all individuals and SMSF trustees who may have entered into a similar arrangement.

      Last modified: 31 Jan 2017QC 49703