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The ATO has been urged to stop hanging anti-avoidance provisions over small businesses who continue to struggle to deal with the complexity of personal services income rules.
Tax & Super Australia tax counsel John Jeffreys believes the ATO’s recent release of draft taxation ruling TR 2021/D2 has reinforced the uncertainty faced by businesses when dealing with personal services income tax.
The ATO notes that the general anti-avoidance rules in Part IVA may still apply to “income-splitting arrangements where the dominant purpose is to obtain a tax benefit for the individual whose personal efforts or skills generated the income”, even when one of the four personal services business tests has been passed.
Conversely, Mr Jeffreys said most small-business operators and tax agents think that when a business has been deemed to be a personal services business, then there is nothing further to worry about.
“It is high time that the ATO dropped its insistence that Part IVA can still apply to an arrangement where personal services are provided through an entity, even after the specific anti-avoidance tests in Part 2-42 have been passed,” Mr Jeffreys said.
“Tax & Super Australia calls on the ATO to make Part 2-42 an exclusive code in relation to anti-avoidance provisions that apply to the derivation of personal services income. This will enable people who run small business and provide services through an entity to have clear rules and no concerns about what is an acceptable structure for tax purposes.
“It is time for the ATO to remove the sword of Damocles, in the form of Part IVA, from hanging over the heads of small-business people who think they are doing the right thing after having passed the stringent tests of Part 2-42, only to find out that this is not the case.”
PSI rules last came into the spotlight in 2009 after the Board of Taxation’s review, followed closely by Dr Ken Henry’s Australia’s Future Tax System Review.
Recommendations were put forward to the government at the time, but no significant reforms have since emerged.
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