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The Australian Taxation Office (ATO) has issued a new compliance guideline, PCG 2024/D2, dealing with the application of the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 to income derived through a personal services business (PSB).
The guideline addresses situations where an individual provides personal services via an interposed personal services entity (PSE), such as a trust or company. Even where the entity passes the tests to qualify as a PSB (i.e. not subject to the personal services income, PSI, attribution rules), the ATO confirms that Part IVA may still apply if the arrangement involves alienation of personal services income (PSI) for the purpose of obtaining a tax benefit, for example through income-splitting with others or retention of profits in the PSE.
The guideline establishes a two-part risk assessment framework. Arrangements are categorised as “low-risk” or “higher-risk” based on a series of indicia. Low-risk arrangements are those where net PSI is distributed to the individual whose effort generated it and is taxed at their marginal rate. Higher-risk arrangements include income-splitting to associates, retention of profits without a clear commercial purpose, or remuneration paid to associates that is not commensurate with the services performed.
Structuring personal services through a company or trust does not eliminate the risk of anti-avoidance scrutiny.
Even if a PSE qualifies as a PSB, advisers should carefully assess whether profit-retention or income-splitting features of the structure might attract Part IVA. Robust documentation, clear commercial rationale, and proper distribution of PSI to the service-provider are essential to mitigate this risk.
