Personal Services Income

We are a member of your service, and I have a question regarding the attribution of PSI. The PSE is not a PSB, and the attribution rules apply.

If the PSE is a company or a trust, do the payments made to the personal services provider have to be classified as “salary and wages”? Or can it then be accounted for as dividends or trust distributions?

I have reviewed many publications, articles, ATO rulings on PSI; however, I cannot find anything that stipulates the payments must be “salary and wages”.

Income tax is not an issue as 100% is payable by the personal services provider. I am only considering the classification of the amounts attributed to him.

I have a client GP who has been required to operate out of a company/trust and can no longer operate as a sole trader. They do not wish to pay SGC or workers’ compensation on their income, and hence I’m looking at ways to achieve this.

Answer

As you correctly state, the attribution rules apply.

Therefore, you will be correctly attributing all of the entity’s income to the Doctor.

We refer you to old taxation ruling IT 2503 and paras 5-7 where they suggest a bona fide attempt should be made for a medical practice company to “break even.”

They mention this should be done by payment of salary and wages.

The ATO’s concerns have included using the lower company tax rate to defer or avoid higher personal income tax.

Another concern is that personal services income is alienated from other family members.

In practice, if:

There is a company that pays a fully franked dividend to the Doctor the following year after payment of company tax. The ATO may take exception to this as there has been a deferment of tax.

Paying a director’s fee in the year of income without PAYG, which does sometimes occur, is certainly not best practice and frowned upon by the ATO. In any case, if it is a director’s fee, it is subject to statutory superannuation (10%).

However, in a trust structure, 100% of the income could be distributed to the Doctor by way of distribution. Here there has been no deferment or alienation of income. This would be extremely unlikely to attract ATO attention. Your client should consider whether they have adequate work cover insurance.