Edited version of private ruling

Authorisation Number: 1011739909226

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Ruling

Subject: Personal services income and Part IVA

Question

Does Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to prevent losses from rental property and other assets held in the trust being offset against the personal services income that is distributed to you?

Answer

No

This ruling applies for the following period:

Income year ending 30 June 2012

Income year ending 30 June 2013

Income year ending 30 June 2014

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are a locum within the medical industry.

You derive income from providing your services to a number of medical surgeries.

It is proposed to set up a discretionary trust, with a corporate trustee, through which you will provide your personal services. The income of the trust will include your personal services income.

You will be the sole beneficiary of the trust. You will also be the sole director and shareholder of the corporate trustee.

All the income of the trust will be distributed to you as beneficiary.

With respect to your personal services income, the trust will be conducting a personal services business.

The main reason provided by you for setting up the trust is for asset and income protection. You believe medical insurance has loopholes and you do not want to be a statistic which loses all their assets.

Property and other assets will be purchased by the trust. The losses from property and other assets will be claimed as a tax deduction to the trust which will reduce your personal services income. The net personal services income will be distributed and assessed to you.

When the assets in the trust are positively geared you will be distributed the rental and share income of the trust, in addition to the net personal services income. No income will remain in the trust.

The following information was provided by your tax agent in a fax addressing the eights factors contained in Section 177D of the Income Tax Assessment Act 1936 (ITAA 1936):

· The manner in which the arrangement will be carried out -discretionary trust with corporate trustee to be set up.

· Form and substance of the scheme - the arrangement is proposed to protect your assets.

· The time at which the arrangement will be entered into and the length of the period during which it will be carried out - indefinitely from the income year ended 30 June 2010.

· The result in relation to the operation of the act but for Part IVA, would be achieved by the scheme - your taxable income will not change. The income will flow to you. The only difference is that the assets will be protected.

· Any change in the financial position of the relevant taxpayer - assets will be held in the trust rather than the individual's name.

· Any change in the financial position of any person who has, or has had, any connection with the relevant taxpayer - none

· Any other consequences for the relevant taxpayer - none

· The nature of any connection between the relevant taxpayer and any other person-none

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Subsection 177A(1)

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Subsection 177C(1)

Income Tax Assessment Act 1936 Section 177D

Reasons for decision

Summary

There is no tax benefit associated with the arrangement proposed. Therefore, Part IVA does not apply to prevent losses from rental property and other assets held in the trust from being offset against your personal services income.

Detailed Reasoning 

You have sought a ruling on whether Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) prevents you offsetting the loss incurred from negatively geared rental properties and other assets before the net income of the trust is paid out to you.

Part IVA

Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances if you obtain a tax benefit in connection with a scheme, and it can be concluded that the scheme, or any part of it, was entered into for the dominant purpose of enabling a tax benefit to be obtained. Part IVA is a provision of last resort.

In order for Part IVA to apply, the following requirements must be satisfied:

There must be a scheme as defined by section 177A of the ITAA 1936.

There must be a tax benefit, as defined by section 177C of the ITAA 1936, obtained in connection with the scheme.

The scheme must be one to which Part IVA applies, as determined by section 177D of the ITAA 1936, where it would be concluded that the taxpayer (or any other person involved in the scheme) had the sole or dominant purpose of entering into the scheme to obtain the tax benefit.

Scheme

For Part IVA to apply, the identified scheme must fall within the following wide definition of 'scheme'.

Subsection 177A(1) of the ITAA 1936 defines 'scheme' as any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct.

In your case, your proposed arrangement falls within this definition. It is therefore a scheme in accordance with the definition in subsection 177A(1) of the ITAA 1936.

Tax benefit

Part IVA cannot apply unless a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme.

Subsection 177C(1) of the ITAA 1936 defines four kinds of tax benefit, relating broadly to:

· an amount not being included in the assessable income of the taxpayer of a year of income;

· a deduction being allowable to the taxpayer in relation to a year of income;

· a capital loss being incurred by the taxpayer during a year of income;

· a foreign tax credit being allowable to the taxpayer.

The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis' or an 'alternative postulate'. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out.

This alternative arrangement also forms the background against which the objective ascertainment of the dominant purpose of a person occurs in accordance with section 177D of the ITAA 1936.

You are a locum within the medical industry. In the recent income year you propose to set up a discretionary trust with a corporate trustee, through which your services will be provided. The income of the trust will include your personal services income. The trust will be conducting a personal services business in respect of your personal services income. You will be the sole beneficiary of the trust and sole director and shareholder of the corporate trustee. All the income of the trust will be distributed to you, as the sole beneficiary. Assets will be purchased and held by the trust. The purpose for entering into the scheme is stated to be to protect your income and assets.

Where losses are made from properties and other assets held by the trust, the income tax consequence of entering into the scheme will be the availability of a deduction to the trust for the net investment loss incurred. The deduction will reduce the personal services income that will be distributed and assessed to you as beneficiary.

Where the assets are positively geared, the net investment income of the trust will be distributed and assessed to you, in addition to the net income derived from your personal services. No income will remain in the trust.

To establish whether there is a tax benefit, it is necessary to consider what would happen if a trust and corporate trustee is not set up to provide your personal services through and assets were not purchased and held in the trust's name.

If the trust and corporate trustee is not set up, you will continue to provide your services as a sole trader. Any assets purchased, will be held in your name. In this case, however, the need for you to be able to protect your income and assets will not be achieved. The losses from rental and other property will be an available deduction to you which will reduce the personal services income assessable to you.

The alternative will result in a reduction of personal services income by an amount of investment loss. The proposed arrangement does not appear to result in any tax benefit gained.

Consequently, no tax benefit will be obtained under section 177C of the ITAA 1936, so Part IVA cannot apply.

Objective purpose test

It is unnecessary to make an objective determination because there is no tax benefit to which Part IVA could apply.

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