Dec 9, 2024 Emily Pell

ATO focus on personal services businesses

Background

The ATO recently released PCG 2024/D2 which is a draft version of a Practice Compliance Guide, setting out some of its criteria for its risk approach to selecting businesses for an ATO audit.

The ATO is particularly concerned when a tax benefit is derived from a scheme where individuals working in the business do not declare income in their personal tax return equivalent to their personal efforts and skills, and use their business structure to avoid tax by:

1. Income splitting: diverting business profits to associates who are not involved in performing the business’ services
2. Retention of profits: retaining business profits in a business structure so that profits are taxed at an overall lower rate

ATO Risk Assessment

The ATO will assess the scheme as low risk by taking into consideration to the following factors:-

1. Business profits are distributed to individuals whose personal efforts and skills generate the income, and they are taxed at an individual’s marginal tax rates
2. Market equivalent remuneration is paid to the individual according to the value of their personal services, and taxed at an individual marginal tax rates
3. Market equivalent remuneration is paid to associates for bona fide services related to earning business revenue, and taxed at that individual marginal tax rate
4. Timing differences exist between earning business income and its distribution for reasons outside control of the individual, or delays which can be explained by non-tax reasons.

This would only create a temporary deferral of tax to the subsequent year

1. The business makes a super contribution on behalf of the individual for the purpose of providing a superannuation benefit
2. There is a temporary retention of profits to acquire an asset for a commercial purpose

The main takeaway to mitigate ATO risk is that the ATO expects income to be declared in an individual’s tax return where they have worked in the business for their personal efforts and skills. This income should be equivalent to the market remuneration they would have earnt had they been an employee of the business.  Talk with your RDL Accountant about how we can help you reduce your risk of audit.