Diverting personal services income
Taxpayer Alert (TA) 2016/6
Strategies that divert personal services income into an SMSF are being examined by the ATO, with a warning issued under TA 2016/6.
Examples include arrangements where payment for an individual’s services is made by the client to a trust/company. That entity then contributes the amount into superannuation so it is taxed at only 15 per cent (in the fund) instead of at the person’s marginal tax rate.
The ATO is reviewing these situations to determine whether:
- personal services income rules apply to tax the individual,
- the contributions constitute non-arm’s-length income,
- anti-avoidance rules apply, and
- the sole purpose test or other rules are breached.
Penalties may apply to promotors and registered tax agents involved may be referred to the Tax Practitioners Board to consider breaches of the Tax Agent Services Act 2009. Clients may wish to apply for a private ruling.
TBCL and Commissioner of Taxation  AATA 264
Another Administrative Appeals Tribunal (AAT) case has resulted in a decision that an adult child living with parents does not constitute an interdependency relationship.
In this case, an adult child returned to live with his parents. The parents had started converting their garage into an independent living space for him when the son died (after four years living back home).
The parents had paid for the son’s training and living expenses as well as other personal items. They shared living expenses equally. The parents provided domestic support via meals, cleaning and laundry and the son helped around the house.
The parents received the superannuation death benefit and applied for a private ruling to be assessed as a death benefit dependant based on an interdependency relationship, but this was declined by the ATO.
The AAT agreed with the tax office. A primary consideration that was not evident in this case (and similar cases) was the mutual commitment to a shared life needed for an interdependency relationship, not just an arrangement of commercial convenience.
LRBA deadline extended
The deadline to restructure limited recourse borrowing arrangements (LRBA) with associated parties on commercial terms has been extended by seven months to 31 January 2017.This extension will allow SMSF trustees more time to understand the guidance provided in Practical Compliance Guideline 2016/5 released during April. The ATO has also agreed to provide further information and examples by 30 September.
This extension may be welcomed by trustees who may have planned to forgive the loan and treat it as a non-concessional contribution by the member, as these plans may have been upset with the budget proposal to introduce a $500,000 lifetime cap for non-concessional contributions. The deadline extension may allow these trustees to gain more certainty about the changes.
SMSF trustees need to ensure all LRBAs are either wound up or use terms consistent with an arm’s-length arrangement by 31 January 2017.
Tracking non-concessional contributions
The federal budget proposed to immediately introduce a lifetime cap on non-concessional contributions to replace the annual cap (and bring-forward rules). If passed as announced, it would capture all non-concessional contributions made since 1 July 2007.Even though this has not passed, advice to clients should take into account the impact of the change. The ATO has advised it can manually calculate the cumulative non-concessional contributions from 1 July 2007 to 30 June 2015 provided the individuals and super funds have met all lodgement obligations.
Written applications can be made to the ATO, but requests for more than 10 clients should be lodged via the ATO’s Tax Agent Portal using portal mail – select topic ‘Superannuation’ and ‘other’.
Voluntary disclosure of breaches
If an SMSF trustee breaches any regulatory requirements, they should work with the auditor to rectify the breaches as soon as possible. If the breaches remain unrectified, trustees (or advisers) should complete the SMSF regulatory contravention disclosure form or apply in writing with supporting documents.
Preservation age increased
The first group of clients with a preservation age above 55 will start to reach the required age from 1 July 2016. Clients born from 1 July 1960 to 30 June 1961 will turn 56 within the 2017 financial year, which is the preservation age for this group.