It Depends – PSI and the anti-avoidance provisions

In this edition of ‘It depends’, graduate Declan Cawley talks about how the personal services income (PSI) rules interact with the anti-avoidance provisions.

Video transcript

Welcome to this instalment of It Depends. In a previous episode, I discussed what personal services income or PSI is and when the PSI rules will apply. Today I’ll be discussing how the PSI rules interact with the anti-avoidance provisions.

Will the commissioner apply the anti-avoidance provisions to my arrangement?

It depends. If an entity derives income from its business structure and subsequently distributes that income in accordance with PCG 2021/4, then the Commissioner will not apply the anti-avoidance provisions. While there are many factors to consider, as a rule of thumb, an entity is considered to derive income from its business structure if it has at least as many non-principal practitioners as principal practitioners.

However, the non-principal practitioners must derive material fees for the entity. If an entity does not derive income from its business structure, even if it is a personal services business, then the Commissioner has made it clear in his rulings that the anti-avoidance provisions may be applied if the entity’s PSI is paid to anyone other than the person who earned it.

An example of this would be the entity distributing its PSI to the family trust of the person who earned it. To make a determination under the anti-avoidance provisions, the Commissioner must be satisfied that there was a scheme and a tax benefit and that the sole or dominant purpose of entering into that scheme was to obtain a tax benefit.

Why is complying with the PSI rules important?

If the Commissioner applies the anti-avoidance provisions to your arrangement, you will be liable to pay any tax shortfall, interest on the shortfall amount and penalties of between 25% and 50% of the shortfall amount. For that reason, if you intend on distributing PSI to anyone other than the person who earned it, it is imperative that you keep records documenting your reasons for doing so. If you have any questions about how the PSI rules may apply to you, please contact a member of the tax team.