ATO targets self-managed super fund tax dodge
The Tax Office has in its sights an emerging tax avoidance tactic being taken up by self-managed superannuation funds.
In its latest taxpayer alert, the ATO warns trustees not to churn what is known as personal services income through an SMSF in an attempt to pay little or no tax.
While only a handful of cases are being investigated, the ATO believes the strategy is being promoted by financial advisers and could become more widespread.
The government is expected to try to curb the cost of superannuation tax concessions in the coming budget.
Consultants and contractors often receive what is known as personal services income, which is paid via a trust, partnership or company for legitimate tax advantages.
PSI is common in professions such as finance, IT, engineering, construction and medicine.
It is distinct from salary income received from an employer.
Tax evasion
Deputy commissioner James O'Halloran said the ATO had become aware of instances where PSI was being placed into an SMSF so that income is taxed at a concessional rate rather than full marginal rates.
"Under [PSI] arrangements, an individual performs services for a client for which the individual does not directly receive adequate remuneration for the service provided," Mr O'Halloran said.
The ATO warns against diverting personal services income to SMSFs. Louie Douvis
"Instead, the client refers remuneration for the service to a company, trust or non-individual entity. The entity then distributes the income to an SMSF, of which the individual is a member, as a return on investment."
Income should be taxed at marginal rates; however, once it is inside an SMSF it is taxed at 15 per cent or, if the trustee has reached his or her preservation age, it is tax-free.
The arrangement described by Mr O'Halloran therefore amounts to tax evasion.
He said these types of arrangements were typically most attractive to SMSF members who are at or approaching retirement age.
This is because those who have retired are able to take a tax-free income from super. And those who are approaching retirement know they don't have long until they will be able to access that tax-advantaged money.
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