Late last week, the ATO issued a taxpayer alert indicating it is reviewing arrangements where individuals divert their personal services income to an SMSF to minimise or avoid tax.
Taxpayer alerts are the ATO’s way of signalling concerns about a new or emerging risky tax or superannuation arrangement.
The arrangements under review are typically used by SMSF members at or approaching retirement age as income received by the SMSF trustee is concessionally taxed or treated as exempt current pension income of an SMSF in pension phase.
“In other words, the SMSF member purportedly avoids paying tax on their income at the marginal tax rate,” said deputy commissioner James O’Halloran.
“Under these arrangements an individual performs services for a client for which the individual does not directly receive adequate remuneration for the service provided. Instead the client refers remuneration for the service to a company, trust or other non-individual entity. The entity then distributes the income to an SMSF, of which the individual is a member, as a return on investment,” Mr O’Halloran said.
For those found to be engaging in these arrangements, relevant earnings could be subject to almost 50 per cent tax.
In addition, there could be a breach of the superannuation regulations, such as the sole purpose test, which also carries penalties.
Taxpayers who may be engaged in these arrangements could put themselves at a significant advantage if they voluntarily disclose their circumstances to the ATO.
“It’s fair to say that there will be a less strong enforcement outcome if [taxpayers] come forward, and certainly reduction in penalties is one of those aspects,” said the ATO’s assistant commissioner Kasey Macfarlane.