TAX TIP #25: | INCOME TAX | PSI v PSB v PART IVA

Facts

Accountant A operates an accounting practice through Trust T. Trust T makes trust distributions to Accountant A’s spouse and children. The accounting practice employs a secretary. The accounting practice has numerous unrelated clients and none of them represents 80% of income, therefore passing the 80% rule and unrelated clients test, and is a PSB.

Question

Is the streaming of the trust distributions to Accountant A’s spouse and children an issue?

Answer

Potentially – Yes, being caught under Part IVA.

Tax Tip

1. Unfortunately, just because the accounting practice is a PSB, this does not automatically mean the profits can be streamed.

2. The fact the accounting practice is a PSB means the PSI rules will not apply. However, it does not limit Part IVA applying.

3. Personal services provided by Accountant A will always be personal services income (PSI), regardless that there is a PSB.

4. The key question to be asked – Is everything, that generates the accounting practice’s income, from the personal services of Accountant A? If yes, then 100% is PSI and any streaming through trust distributions, to parties with lower tax rates than Accountant A, will very likely be caught by Part IVA.

5. However, there are many avenues to argue that not all the accounting practice’s income is generated from the personal services of Accountant A:

   1. the number of arm's length employees or others engaged to perform work;

   2. the existence of goodwill;

   3. the extent to which income-producing assets of the business are used to derive the income;

   4. the nature of the activities carried out;

   5. the size of the operation;

   6. the extent to which the income is not dependent upon a particular individual's own personal skills, efforts or expertise.

For example, if Accountant A has generated a unique style for his/her financial reports, which clients appreciate as adding value and that is why they remain loyal, it could reasonably be argued there is goodwill in that practice. Or Accountant A has a social media following through posts/blogs which generates leads that convert well, this could reasonably be argued as goodwill. Or if the accounting practice were to hire an employee and that employee could perform some, or all, of the same services that Accountant A currently performs and there is a profit remaining after deducting employee costs per matter, then it could reasonably be argued the profit margin is goodwill. If none of the above can be demonstrated, the accounting practice’s income appears 100% generated from the personal services of Accountant A (100% PSI) and any streaming of trust distributions is very likely caught by Part IVA.

6. The first issue that must always be covered is – Accountant A must be paid a market value salary/wage. This will support the argument that Accountant A has been rewarded for providing his/her personal services (PSI). If this first issue is not satisfied, Part IVA will very likely apply.

7. Once the first issue is out of the way, the focus can be on the points set out in 5(A) to (F) above to limit the application of Part IVA. It may appear as if many clients can satisfy point 5(A) to (F), however, it must not be assumed as always satisfied just because your client may be a PSB.

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