It provided that an entity that derived personal services income of an individual was required to attribute its income to the individual unless the entity conducted a personal services business.

Those rules reserve the opportunity for the general anti-avoidance provision of the tax law, Part IVA, to apply in certain unspecified circumstances, even where the entity was found to conduct a personal services business.

Since that time, the scope of Part IVA has increased, and the ATO has now issued a practical compliance guideline, PCG 2025/5, to explain when Part IVA will apply to attribute the personal services income of an entity to an individual, despite the personal services entity conducting a personal services business. Whilst the ATO’s previously issued guidance PCG 2021/4 remains on foot and deals with the income of professionals derived through entities, PCG 2025/5 also deals with tradespeople.

The PCG runs to 25 pages. Its contents can, perhaps, be summarised in one sentence. In almost all cases, the ATO will take the view that Part IV A could apply to the derivation of personal services income through an entity. Accordingly, unless the PSI is paid to the person providing the services in a way that is taxable to them on a current year basis, then the ATO will consider the arrangement “high risk” and may apply compliance resources to investigate.

The PCG contains numerous examples, many of which are interesting for the low level of tax benefit that is obtained but which still, in the ATO’s eyes, potentially trigger the application of Part IVA.

Some of the examples appear extreme. In Example 11, an electrician operates his business through a company in which he owns the shares. The company derives income of $215,000 during the year, and the electrician is paid wages of $189,000. Accordingly, $26,000 of pre-tax profit is left in the company and taxed at the company tax rate of 25%. This provides a difference in tax payable of roughly $5,700 from the situation that would have prevailed had the electrician individually derived all the income. This situation is seen as high risk by the ATO because:

“This example involves the retention of a significant part of an individual’s PSI in a lower-taxed entity and is therefore considered a higher-risk arrangement that brings Part IVA into question. This means that we are more likely to have cause to consider applying compliance resources to reviewing this arrangement, including a consideration of whether Part IVA should apply.”

Whilst you may or may not expect a self-employed electrician claiming to only earn $215,000 to be brought before the General Anti-Avoidance Rules panel, you would not think that it is because they have created a 22% timing difference on 12% of their income.

The PCG is a cautionary reminder that the general anti-avoidance rules can apply despite the existence of a specific anti-avoidance rule covering a particular topic. Further, it is a reminder that the ATO’s view of what might constitute tax avoidance is often far wider than that of the taxpayer and advisor communities. If you’re unsure how these rules may affect your arrangements, please contact Philip Diviny, Principal.

The information provided in this article is general in nature and cannot be relied on as legal advice, nor does it create an engagement. Please contact one our lawyers listed above for advice about your specific situation.