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The Australian Taxation Office (ATO) released Draft Practical Compliance Guideline PCG 2024/D2 on Personal services businesses and Part IVA of the Income Tax Assessment Act 1936 on Wednesday, 28 August.
The draft guideline addresses how the ATO will apply their compliance resources to consider the potential application of Part IVA of the Income Tax Assessment Act 1936 (Cth) (the general anti-avoidance provisions of the income tax law) where personal services income (PSI) of an individual is derived through a personal services entity (Eg. trust or company) that is conducting a personal services business (PSB).
The draft guideline illustrates the ATO’s narrow view on the application of Part IVA to PSI received by a PSB to both past and future arrangements.
PSI is defined as income that is mainly a reward for an individual's personal efforts or skills. Where more than 50% of the income received for the service relates to the personal efforts or for the exercise of the skills of an individual, the income is regarded as PSI.
Income generated from a business structure is not PSI; therefore, the PSI rules and this draft guideline have no application. To determine whether income is generated from a business structure, the following factors need to be considered:
Where income is generated from a business structure, Practical Compliance Guideline PCG 2021/4 Allocation of professional firm profits – ATO compliance approach is the appropriate guideline, addressing arrangements where the allocation of profits or income from professional firms is allocated to associated entities.
Where the income received is PSI, and the entity has passed the tests to be classified as a PSB, the PSI attribution rules do not apply.
This draft guideline states that where the PSI rules do not apply, and there has been a dominant purpose to receive a 'tax benefit', the general tax avoidance rules of Part IVA will apply.
Broadly the draft guideline provides that there is a high risk of a review by the ATO in relation to Part IVA where any of the below factors are present:
This draft guideline may have significant impacts to small PSI businesses that have been retaining PSI income within a company for investment purposes.
The draft guideline is subject to change, with consultation closing on 11 October 2024.
Please contact your Ulton Advisor to review your current arrangements and determine whether any action is required.
Check out our other articles on the ATO's compliance approach to PCG 2021/4 allocation of professional firm profits.
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