General anti-avoidance rules and PSI

Overview

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

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

The PSI rules were introduced to prevent the diverting, alienating or splitting of income with other individuals or entities in an attempt to pay less tax.

The general anti-avoidance rules (GAAR) may still apply if you are a PSB and the PSI rules do not apply. For the GAAR to apply to your arrangement, there must be a sole or dominant purpose to obtain a tax benefit.

When the GAAR may apply

The GAAR may apply where there are factors indicating that the dominant purpose of the arrangement is to obtain a tax benefit by diverting, alienating or splitting your PSI or retaining profits in your lower-taxed company, partnership or trust (being an interposed entity).

In deciding whether the PSB has engaged in income splitting to gain a tax benefit, the following considerations may be relevant:

• Whether the salary or wages paid to you is commensurate with
  • the skills you exercised or services you provided, and
  • the income received by the PSB for your services.
   
• Remuneration commensurate to the value of your services will generally be the gross amount received by the PSB for your services, less allowable deductions (other than deductions associated with non PSI income of the PSB or income splitting).
• Whether the PSB distributes income to associates and does not distribute income to you, the individual who provided the actual services.
• Whether the salary or wages paid to associates by the sole trader or PSB is not commensurate with
  • the skills exercised and services provided by the associate, and
  • the income received by the sole trader or PSB is for services performed by the individual (which is different to income being generated by assets of an interposed entity).
   

Examples include if you:

• use a company, partnership, or trust to retain profits from your PSI
• divert, alienate or split your PSI with an associate – which reduces your overall income tax liability, or
• create an entitlement to deductions which would not be available to an individual providing the same services as an employee.

The GAAR Panel advises on the application of the GAAR to particular arrangements.

In certain circumstances, the general anti-avoidance rules may apply to your personal services income arrangements.