There are many PSI examples in PCG 2024/D2, but all are pretty black and white.
PSI Examples in PCG 2024/D2
Here are six PSI examples in PCG 2024/2 Andrew Henshaw of Velocity Legal in Melbourne discusses in this interview.
Here is what we learned, but please listen as Andrew explains all this much better than we ever could and goes into a lot more detail.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
PSI Examples in PCG 2024/D2
The examples in PCG 2024/D2 are very black-and-white and, hence, not that helpful. But here are six examples to give you an idea of what the PCG looks at.
Example 1 – Eddy the Accountant
Eddy is an accountant who provides his personal services (PSI = Personal Services Income) through a family trust, a PSE (PSE = Personal Services Entity). The trust employs Eddy as an accountant and his wife Maggie as admin support. The PSE passes the Unrelated Clients Test; hence, it qualifies as a PSB (PSB = Personal Services Business). The trust pays Eddy below market value and Maggie at market value. However, any profit is distributed only to Eddy.
Per PCG 2024/D2, this is a low-risk arrangement because all PSI is included as assessable income in Eddy’s individual tax return through the salary paid by the Trust and the trust distribution to Eddy. No income splitting, no retention of profits.
Example 4 – Tran the Solicitor
Tran is a solicitor who provides his personal services through his company, which usually pays out all profits to Tran as a salary plus bonus, apart from one year when Tran was sick.
The PCG considers this a low-risk arrangement because the deferral of income was temporary and driven by factors outside the taxpayer’s control. Further, the usual pattern of behaviour resumed in the following years, demonstrating the timing difference was an isolated occurrence.
No income splitting, isolated retention of profits driven by factors outside of taxpayer’s control.
Example 6 – Hayley the Doctor
Hayley is a doctor and the sole shareholder and director of her company, which she self-assesses as a PSB. The company usually pays Hayley all profits, such as salary, bonuses, and director’s fees. However, in one year, Hayley retained AUD 7k in profits to invest in new equipment. As it turns out, the equipment only costs AUD 5k, so Hayley pays the remaining AUD 2k to herself as a bonus straight away after the purchase.
The PCG considers this a low-risk arrangement because the temporary retention of profits had a clear commercial purpose to increase future profits.
No income splitting, temporary retention of profits for commercial purposes.
Example 7 – Kelly the Broker
Kelly is a broker who changed from a sole trader to a trust with a corporate trustee since Kelly was previously held personally liable for a client’s default. The trust doesn’t pay Kelly a wage and distributes more than half of the profit to Kelly’s children.
The PCG states that, although entities have been interposed between Kelly and the clients for clearly commercial purposes – to limit personal liability, Kelly has utilised the trust to split income.
Kelly and her children pay less tax than they would have paid if Kelly had disclosed the entire net PSI in her individual tax return. Hence, Kelly received a tax benefit.
This example involves the splitting of an individual’s PSI. The ATO, therefore, considers this a higher-risk arrangement that brings Part IVA into question.
Example 8 – Chester the Consultant
Chester is a corporate consultant with three clients, making about AUD 400k yearly as a sole trader. Chester then transfers his business to a company, where he is the sole director and shareholder. Going forward, the company only pays himself AUD 20k as a wage, with the remainder of the profit going to Chester via a Div 7A loan.
The PCG considers the retention of profits a higher-risk arrangement that brings Part IVA into question.
Example 9 – Diana the IT Consultant
Diana is an IT consultant employed by a company she and her husband control. The company employs Diana and her husband, but only Diana does principal work. Annual profit is about AUD 400k. Diana only receives an AUD 80k salary, even though she is the only one working in the business. Joe receives AUD 5k for his admin services – Joe has employment income of AUD 174k from an unrelated employer.
Each year, the company retains any remaining profit. And then invests this profit in a share portfolio. The company has never ever distributed any profits. Diana and Joe live off their respective employment incomes.
The PCG states that this example involves the retention of profits in a lower-taxed PSB. It is, therefore, considered a higher-risk arrangement that brings Part IVA into question.
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So, these are six of the examples in PCG 2024/D2. Please listen to the episode since Andrew Henshaw goes into a lot more detail and shares very valuable insights.
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