Avoid the ATO and keep your income personal

The changes to the business tax system introduced last year has resulted in hundreds of planners being hit by rules designed to cut down on the alienation of personal services income. Jason Spits looks at how dealer groups and planners are reacting to an industry wide issue.

Any planner struggling to understand the alienation of personal services income (APSI) laws and how they work within their practice are not alone.

With over 1000 planners through its dealer group arm, MLC is finding it difficult to provide assistance in tackling the ongoing problem of APSI.

This is not to say that MLC has been lax or uninformed on the issue. Rather, according to MLC national technical manager Chris Drummer it has been very proactive.

Drummer says that despite numerous meetings with planners and the Australian Tax Office (ATO) and the Financial Planning Association (FPA) the way ahead is still difficult and uncertain.

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And despite the best effort of the industry, planners and dealer groups find themselves faced with an issue which concerns nearly all of them yet must be treated almost on a case by case basis.

Evidence of this is a series of case studies created by MLC, the FPA and the ATO which breaks down many of the scenarios planners will face. However those expecting a quick and easy read will have to dig through one or more of the 29 studies before seeking further advice.

Drummer says unfortunately this is the only way at present that the industry can deal with the issue.

"Through MLC's dealer group channels we have emailed our planners and advisers and recommend that they seek their own tax advice, since each practice has different characteristics," Drummer says.

"This is much like the introduction of the GST in its scope in that each case has to be weighed on its own merits. However the buck stops at the planners and we can only offer generic advice."

AXA business risk distribution manager Ken Robinson says while it has also come to the same conclusions the group understands the dilemma facing planners.

"As a product manager we have the interests of our planners at heart and we understand that this goes to the heart of each one of their businesses," Robinson says.

"We are sympathetic to the issue but as professionals, planners do not want us or need us involved in issues of practice management."

Robinson says AXA is giving advice about what areas planners should consider but is taking a back seat role in this case.

"Planners and advisers have their own professional bodies and these are working with the Government to get some consensus on the issue. It is appropriate we interact there and offer assistance to advisers," Robinson says.

While the solution may not be easy to reach FPA policy manager Con Hristodoulidis says it is not too difficult for planners to check if they are affected by the changes.

He says planners need to check if they will earn personal services income and if more than 80 per cent of that will come from a single source. At this point planners do not need to act but will have to pay tax outside any corporate structures they may have in place. Planners will also have to re-examine the nature and extent of deductions.

"Sole traders and those involved with life products should check the case studies on the FPA web site and seek advice about securing a determination," Hristodoulidis says.

"Those working within a corporate entity or structure should examine if they can legally get outside the net cast by APSI or seek advice about the best way to work within it."

However Hristodoulidis says the numbers of those caught in the net will number over 25,000 after the introduction of the Financial Services Reform Bill (FSRB). The increase is due to the Bill extending the licensing requirements to cover general insurance advisers as well as life and risk advisers.

Despite the increase in numbers due to arrive Drummer says there is still little consensus on what rules will eventually apply with even the definition of personal services income open to debate.

Hristodoulidis says ultimately it is an issue of interpretation of the law and how income is derived with the ATO considering it to be paid from the dealer while the industry says it flows through from the client.

"Whose interpretation will hold and said to be correct is unknown but we hope that at the end of the day the courts don't have to make that decision," Hristodoulidis says.

"If we can remove some of the requirements from the APSI laws which clash with current Corporations Law we can solve about 75 per cent of the problems."

"There is only limited action available to planners at the moment but hopefully legislative changes may give the industry relief and the ATO less chance to come back to this issue in the future."

Pull out box

The alienation of personal services income (APSI) legislation became active last year when the Federal Government introduced a raft of new personal and business tax laws.

The legislation is designed to cover workers in a range of industries who may work on a contract basis and is aimed at ensuring the correct deductions and tax payments are made by these workers.

The APSI legislation states, in a contract situation, that any income exceeding 80 per cent from one source is personal services income and deductions and tax are not levied at a company level but at the individual's marginal tax rate.

However financial planners also fall into this category as the Australian Tax Office (ATO) considers that planners receive more than 80 per cent of their income from their dealer group, regardless of the amount of clients on the books of each planner.

However the industry and the Financial Planning Association (FPA) claims planners receive income from clients which is passed from fund managers to the dealer group and onto planners.

The dealer/planner system has developed in response to the current Corporations Law which requires such a relationship. At the same time it has been the center of the debate with two differing interpretations of where payment is actually derived.

Since discovering the change in mid last year the FPA has lobbied the Treasure Peter Costello, the Assistant Treasurer Rod Kemp and the Minister for Financial Services Joe Hockey. It has also met with numerous Federal and Opposition MPs in a bid to open up the debate.

According to FPA policy manager Con Hristodoulidis, the FPA is also working with the Australian Security and Investments Commission (ASIC) on changes to the current Corporations Law which, if accepted by ASIC and the ATO may provide relief for planners.