How to avoid being slugged by alienation
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.
Planners struggling to understand the alienation of personal services income (APSI) laws and how they work within their practice are not alone.
With more than 1000 planners in its financial planning 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, the Australian Taxation Office (ATO) and the Financial Planning Association (FPA), the way ahead is still difficult and uncertain.
And despite the best efforts 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.
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 e-mailed our planners and advisers and recommended that they seek their own tax advice, since each practice has different characteristics and we can only offer generic advice," Drummer says.
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 while we are sympathetic to the issue, as professionals, planners do not want us or need us involved in issues of practice management," Robinson says.
"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, Drummer says it is not too difficult for planners to check if they are affected by the changes. He has put together this list for planners but recommends independent advice still be sought.
* Will personal services income (PSI) be earned during the financial year? If not or if it is received fully as a salary through a company, trust or partnership, alienation provisions do not apply.
* If PSI is expected and not received in either of the above methods, does 80 per cent come from a single source? If this is not the case the planner may be self assesed according to three tests. Those who receive more than 80 per cent from a single source need to seek a determination from the ATO.
* The first test examines whether a planner is doing business with clients not related by business or family links.
* The second examines if a planner will use other individuals or entities to perform at least 20 per cent of the work required to generate income. These parties can not be related through certain business or family links.
* The third test states the planner needs to maintain and use business premises where most business activity occurs and is used exclusively by the planner. These premises are to be separate from those used for private purposes and from those of clients.
* Planners who are self assesing need to pass any one of these three tests to comply with the legislation.
* Those seeking a determination will need to pass the second or third tests. The first will not be considered unless special circumstances can be shown as to why a planner may fail some or any of the tests.
* A fourth test exists but with this, planners must show income is for producing a result, and they are required to supply the plant and equipment or tools of trade needed to perform the work, and are liable for the cost of rectifying any defect in the work performed.
* Those not successful in self assesment or not receiving a determination will be considered as not conducting a personal services business.
* Planners in this situation will need to reduce the level of personal services income through deductions, but these will be limited. Any remaining personal services income will be counted as assesable personal income of the planner and taxed at their marginal tax rate.
FPA policy manager Con Hristodoulidis says the PSI issue affects about 75 per cent of the industry and there is no relief for many, short of unwinding current corporate structures and company arrangements.
"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.
"However, those working within a corporate entity or structure should examine if they can legally get outside the net cast by APSI. Failing this they should seek advice about the best way to work within it," Hristodoulidis says.
AUTHOR
Jason Spits
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