Doctors who avoid paying higher taxes by directing personal services income through another entity such as a family trust to split income are in the sights of the Australian Tax Office.
The ATO published a practical compliance guide on the topic in November, which reinforced rules around redirecting or retaining income away from the individual who performed the services.
Michael Deeny, the head of tax and accounting division at Smith Coffey, told Medical Forum such guides were published when the ATO was “looking at targeting certain areas”.
This could be relevant to high income earners such as doctors, and the ATO’s guidance uses a medical practitioner as an example.
It means that while a professional may believe their current way of operate is compliant with the law, if it is reducing the overall amount of tax payable then it could fall on the wrong side of anti-avoidance provisions in tax laws that cover personal services businesses.
“What the practical guide is all about is personal services income. What that means is if there’s any income that the individual is earning for their own skills and their own knowledge, the income being generated from that, they have to be the person that pays the tax on that,” Mr Deeny said.
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He said doctors were among those who earned personal services income, so they may want to ensure they were complying with the ATO’s guidelines.
“There’s potentially doctors who are using companies, or a trust, that are earning that personal services income, who have been paying less tax either through the corporate tax rates or family members that are on low tax rates,” he said.
“My understanding is that it doesn’t appear that the tax office is going to backdate any of the compliance requirements, they are just looking to make sure that professionals, including doctors, are making attempts to do the right thing,” Mr Deeny said.
RSM tax and business advisor Thomas Leslie said the risk of being caught out for income splitting are severe.
“The new guideline confirms that taxpayers have until the June 30 2027 to move into a low-risk arrangement without concern for retrospective compliance action, so with this in mind, rectifying any arrangement where tax avoidance is the primary motive should be a priority.
“There are three key steps that can be taken right now to reduce your risk.
“The first is to sit down with an experienced business or tax adviser and ask them to ensure all your income arrangements comply with tax law and the new guidelines.
“Secondly, ensure you are maintaining clear documentation, because if your actions could fall into the high-risk category, you’ll need to justify those decisions, with records of why you have chosen a particular approach and how the funds will be used.
“Lastly, recognise that complacency is your enemy. In an era of automation and AI, the ATO has access to more data matching tools than ever before, so don’t assume you’ll fly under the radar.”
The practical compliance guide is available on the ATO’s website.
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