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ATO targeting SMSF tax avoidance

The Australian Tax Office has its sight set on an emerging tax avoidance tactic being taken up by a number of self-managed superannuation funds.

The ATO has warned trustees not to use a strategy known as personal services income (PSI) through their SMSF to pay little or no tax. Even though only a handful of cases are currently being investigated, the Tax Office believes the strategy could become more widespread.

Consultants and contractors often receive a personal services income (PSI) which is paid via a trust, partnership or company for legitimate tax advantages. PSI is common in professions such as finance, IT, engineering, construction and medicine, as it is distinct from salary income paid by an employer.

The ATO had become aware of instances where PSI was placed into an SMSF so that the income was taxed at a concessional rate rather than full marginal rates.

The Tax Office has released a statement that seeks to make it clear that individuals who are avoiding paying income tax by directing their earnings into their self-managed superannuation fund are breaching the law.

Those that are found to be promoting these or similar arrangements will leave themselves open to the possibility of penalty under the promoter penalty laws.

The ATO has issued guidance for SMSFs about related-party loans and dividend stripping, where a private company channels franked dividends into an SMSF, instead of the company’s original shareholders, to escape tax.

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