My partner who currently lives separate from me is currently on an income of 230K doing a type of employment in which she is actually hired by the government under contracted work. Once this person finishes their additionall qualifications, the income will likley be in the relm of 400K. I am wondering if it is possible to create a trust in order to funnel part of this persons income as my own in order to minimise the overall tax paid. For example 400K-100K, my personal income is 50K and I pay the relevant tax rates of 50-150K per annum and the partner pays tax on 300K.
This is a tax avoidance scheme and is illegal. The ATO is cracking down on exactly this type of tax fraud and so I would definitely not do it.
Cheers,
LukeThe term the ATO uses for this is 'alienation of personal services income' if you would like to search for it o the ATO website.
Luke
Well it seems legit. I mean if it is "our" income and my income is low and I know there are certain laws that allow you to funnel atleast part of your partners income through a trust. Perhaps the laws changed but I have heard this type of stuff being done in the past. But perhaps not anymore…
Cheers
No it is not legit- it is your partners income, not yours. If you read the ATO website, you will see that they consider this arrangement tax avoidance and will prosecute people who do it.
Maybe in the past it was possible, but not now.
Cheers,
LukeIm having a look now, can you find that bit for me? Im reading about Alienation of personal services income. Do you know which tabs talks about that example?
General principles
- Arrangements where personal services income is alienated (for example, because your personal services are contracted through your company, trust or partnership) and taxed at a lower rate than if you had received the income yourself may attract Part IVA, particularly where your remuneration is less than commensurate with the value of your services. This means that the income may be assessed to you rather than to the entity. This will depend on your circumstances and each case must be decided on its own merits.
- If you split personal services income with an associated person, or with another entity associated with you, then Part IVA may apply to that arrangement. However, you can pay remuneration (for example, salary or wages) to an associate (or a service trust) for bona fide services related to the earning of your personal services income if that amount is reasonable for the services provided by them.3 In supporting the claim it would be advisable to have details of the dollar value of the hourly rate of pay and the number of hours being paid (recorded by for example time sheets, diary records or the like) and of the duties involved and how they relate to the work being undertaken by the principal.
- In particular if you use a family trust or company to split personal services income with an associate (say a family member) and thereby reduce your income tax liability, then Part IVA may apply to that arrangement. For example, Part IVA may apply where a salary is paid to you as the principal worker by your trust or company and that salary is not commensurate with the value of your services4, and the remaining income is distributed to associates. In most cases, a salary commensurate with your duties and responsibilities will be the gross amount received by your trust or company less allowable deductions (other than deductions associated with income splitting).
Even if you have to provide your services through an interposed entity in order to obtain the relevant service contract Part IVA may still apply if you use that entity to split your income or retain profits.
What can I do to ensure the general anti-avoidance provisions do not apply?
Notwithstanding these general principles, the application of Part IVA requires a conclusion in the particular case that the dominant purpose of the relevant arrangement was to obtain a tax benefit.
It is not therefore possible to give certainty as to the application of Part IVA in the absence of each factual situation being examined.
You can obtain certainty for your individual circumstances by applying for a private binding ruling. Alternatively taking the following steps will avoid the potential operation of Part IVA.
If you are operating through a company
If you operate through your company and there is no income splitting and no retention of profits in the company (for example, if the only advantage for income tax purposes is access to greater superannuation benefits) then Part IVA will not apply.5
If a bona fide attempt is made to break even, a relatively small amount of taxable income may be returned by the company provided that income is distributed to you by way of a franked dividend in the following year.6
If you are operating through a trust
If you operate through your trust with a corporate trustee the position is the same as for companies.7
You should receive income from the trust in relation to the personal services income that is commensurate with your duties and responsibilities, or be the sole beneficiary of the trust in relation to that income.8
If you are operating through a partnership
If you are in business and you conduct that business with your spouse through a genuine partnership then this will be accepted for income tax purposes.9
Where the partnership income results from the personal services of one or more of the partners (not from the services of employees or the use of income-producing assets) and where there is splitting of that personal services income which reduces the amount of income tax which might otherwise be payable, then Part IVA may apply to this arrangement.10
How will the Tax Office apply the views contained in this fact sheet?
This fact sheet restates our views on when Part IVA may apply to personal services income cases.
We accept others may disagree with these views and that concepts of employment, business and entrepreneurship have progressed since the cases from which our views were formed were heard. We are looking to identify test cases to obtain further judicial guidance as to the correctness of our views. We are doing so in consultation with tax professional bodies.
While these views are being tested in the courts we will not be running a specific audit program in this area other than to support the test case program. However, cases arising from our ongoing audit operations will, as is currently the case, be progressed as necessary.
Okay, here you go. Part IVA (as per paragraph three above)
"A penalty of up to 50% of the tax avoided may also apply, although the law allows this penalty to be reduced in appropriate circumstances. If you have a reasonably arguable position the penalty will not exceed 25% of the tax avoided".
So basically my understanding from this is that if you were being investigated by the tax office then you would need to demonstrate that "tax avidance/reduction" was not the sole reason for the trust. I havent seen anything that this proposed senario is illegal yet.
She has to overcome the PSI rules but it could be possible to set up a consultancy firm.
I wouldn't say it outright illegal. Usually income if it is personal services income will be taxed in the hands of the individual even if it is received by a trust or company. If you can overcome the rules you can have it via the trust.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
My understanding is that you can do it, but only under certain circumstances.
For example, you could be the bookeeper for your husband, so he pays you an hourly rate to arrange invoices, do the banking, and other miscellaneous items. However you must be paid at a market rate and for a reasonable amount of hours worked. So I don't think that it is possible to stream $100k of that income to yourself in return for these services as the ATO would most likely consider this to be unreasonable for the amount of work involved on your part.
I have heard of schemes where a person purchases a PPOR in a trust structure and also earns income in another trust structure through a contracting arrangement. He then furnishes the house and rents the house to himself making it a negatively geared investment. He distributes money from the employment trust into the property trust to offset the negative gearing losses and to reduce his tax. I would like to hear an accountants view on this scheme and whether it would be disallowed under the alienation of personal services income ruling, as it sounds pretty dodgy to me, but his accountant seems to think it is perfectly fine so maybe that is one way to do it.
Cheers,
LukeLuke,
You just have to overcome a few rules. From memory these relate to the number of customers you have – income of more than 80% from one source is not good.Do you have control over your work, or does an employer direct you?, do you have your own tools, set you own hours, take your own risks, have you own premises etc.
If you can meet the rules then you could do what you describe. But really the trust should be providing some sort of wage to the person doing the work, so it all shouldn't end up in the trust.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Okay, thats great. Also a fair call to. I could be employed by the trusts company as a bookeeper for a reasonable hourly rate which is comparable to other people doing a simular line of work and then it may be acceptable to the ATO.
Terry, sorry I dont know what are the PSI rules?
Personal Services Income.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
When deciding how much is relevant to employ me as a bookeeper what would be a good resource for deciding how much would be appropriate to funnel through a trust?
I mean I know there are many websites outlining average salories by hour in various roles but is there an official one which is perhaps run by the government giving a ballpark figure…?
Ishtvan051 wrote:When deciding how much is relevant to employ me as a bookeeper what would be a good resource for deciding how much would be appropriate to funnel through a trust?I mean I know there are many websites outlining average salories by hour in various roles but is there an official one which is perhaps run by the government giving a ballpark figure…?
You seem to have reached the conclusion that the PSI rules and/or Part IVA do not apply to you ?
Where caught, there are no permitted deductions for paying an associate to do clerical/admin work.
Where not caught, the ATO reserves the right to apply Part IVA in cases where a personal services business is also being carried on.
Just because a Government dept is your partner's "client" does not mean that PSI rules will not apply. Your partner should already have got advice on this because it affects both parties regarding deductions, PAYG withholding, super, etc.
Cheers,
Rob
No conclusions reached. Obviously the PSI rules need to be investigated.
Your accountant will be able to help.
Cheers,
LukeI just had a look at the Pat IVA. It appears that you would not be allowed to purely 'stream' your parters income through a trust and distribute it to yourself to save tax.
From the Part IVA document:
In the absence of unusual features, therefore, Part IV A would not
apply to such husband and wife partnerships. The sort of unusual
features that could see Part IV A apply include where the:– income generating activity was in reality a disguised
employment arrangement, or
– use of the partnership is prohibited by regulatory or other laws.In employee?like arrangements, provisions in the income tax law
which specifically deal with the alienation of personal services
income may apply in any event. This would mean that the
partner performing the main bulk of the work is taxed on all
of the partnership income. In such cases, Part IVA would have
no application.Reading the above, it appears that your husbands work is in fact a disguised employee arrangement. He is getting paid as a contractor although in reality he is an employee (I could be wrong though as I dont really know the nature of your husbands work).
I think you really should talk to a good accountant as they may have a way around this so you can stream the income to save tax.
Cheers,
Luke- Arrangements where personal services income is alienated (for example, because your personal services are contracted through your company, trust or partnership) and taxed at a lower rate than if you had received the income yourself may attract Part IVA, particularly where your remuneration is less than commensurate with the value of your services. This means that the income may be assessed to you rather than to the entity. This will depend on your circumstances and each case must be decided on its own merits.
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