Money
Issue No. 20 - December/January 2005
Income Splitting
by Maria Benardis
The spotlight is on income splitting arrangements that are predominantly focused on avoiding tax. The Commissioner will apply Part IVA of the Income Tax Assessment Act 1936; the "anti-avoidance provisions" (Part IVA) to such arrangements and cancel any tax benefit made. In addition the ATO will apply heavy penalties.
The ATO is also focusing on arrangements involving the splitting of personal services income by personal services businesses ("the contractor provisions"). The ATO is funding a number of test cases in the courts on this area and will seek to apply Part IVA to such arrangements.
Below are some tips & traps to consider:
- If an entity derives income from personal services and attempts to split that income with family members by diverting it to a family company or trust, then this may be viewed by the ATO as an attempt to avoid tax. These arrangements could attract the operation of Part IVA.
- If a taxpayer uses a family trust or company to split personal services income with an associate (say a family member) and thereby reduce their income tax liability, then Part IVA may apply to that arrangement.
Part IVA may apply where a salary is paid to the taxpayer as the principal worker by their trust or company and that salary is not commensurate with the value of their services, and the remaining income is distributed to associates. For example, a taxpayer in business may employ family members in the business - provided the employment is bona fide and the wages reasonable in amount, an income tax deduction is allowable for the wages.
- It is possible to be involved in income splitting but to not attract adverse income tax consequences. There are not any adverse income tax consequences where, for normal business or commercial reasons, a trading enterprise is incorporated and the business is conducted along normal commercial lines. The operation of a service company or trust, where the charges are com...
