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Personal services income awareness required

It is important for SMSF auditors to take note of a recent ATO taxpayer alert when performing their annual scrutiny of funds, writes Neil Ashton.

Having recently negotiated their peak season, SMSF auditors may be unaware Taxpayer Alert TA 2016/6 was issued on 29 April, relating to the diversion of personal services income, under part 2-42 of the Income Tax Assessment Act 1997, to an SMSF.

The alert essentially deals with individuals performing services for a client, but not directly receiving consideration for the services rendered.

Instead, the consideration for these services is paid to a company or trust, or potentially some other non-individual entity, which in turn distributes this income in the form of a dividend or distribution to the SMSF.

With the concessional rates being anywhere between zero and 15 per cent within an SMSF, the tax savings these types of arrangements can deliver can be highly lucrative.

Specifically, the ATO considers the following with respect to the personal services income diverted to an SMSF:

· the income remains assessable income of the individual,

· the income may constitute non-arm’s-length income to the SMSF, which is therefore not entitled to concessional tax treatment or considered to be exempt current pension income,

· the amounts distributed to the SMSF may be a contribution to the fund and subject to the contribution caps, and

· sole purpose test considerations may be appropriate where the arrangement may lead to the fund being maintained for purposes other than providing retirement or death benefits.

While SMSF auditors are not required to audit the financial statements of a related company or trust, they should already be obtaining sufficient appropriate audit evidence for these investments to form an opinion on whether the fund has complied with sections of the Superannuation Industry (Supervision) (SIS) Act, such as:

· sections 80 to 85 relating to the in-house assets,

· section 65 relating to the provision of financial assistance to members or relatives,

· section 109 relating to maintaining investments at arm’s length, and

· SIS Regulation 8.02B relating to recording fund assets at market value.

With the release of this taxpayer alert, SMSF auditors may need to ensure the issues raised by the ATO with respect to the diversion of personal services income are appropriately dealt with in forming their audit opinions.

Further, where the auditor believes the ATO should be informed of these types of arrangements, they may do so in accordance with section 130A of the SIS Act.

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