The Personal Services Income attribution rules are specific anti-tax avoidance legislation designed to prevent high-income earners from diverting personal services income to associated entities (like companies) to avoid the top personal tax rate. The rules were introduced because of the difference between corporate tax rate and highest personal marginal tax rate which can incentivise taxpayers to divert income from personal name to a company. Currently, the corporate tax rate is 28% and the highest personal tax rate at 39% so the tax difference is 11%. If the attribution rules apply, the associated entity’s income needs to be fully attributed to its working owner for tax calculation purposes.
Below are the criteria for the attribution rules to apply. All criteria must be met.
- 80% or more of the income is from one buyer or person associated with the buyer
- 80% or more of services are performed by the working person or their relative.
- The working person’s net income must exceed $78,100, calculated including any amounts available for attribution.
- Substantial business assets must not be a necessary part of the business structure. Assets are substantial if they cost over $75,000 or 25% of the entity’s service income.
Key statutory exemptions prevent attribution in some circumstances, such as the de minimis rule if the amount to be attributed is less than $5,000, or if the services are essential support for a product supplied by the entity. Inland Revenue emphasises investigations focus on the commercial reality of the business.
Watch our video on the rules here:
The Personal Services Income attribution rules remain a high-priority area for Inland Revenue, especially following the introduction of the 39% top personal tax rate, which highlighted the opportunity for tax manipulation via the corporate tax rate. Since these rules focus on the commercial reality of the business rather than market salaries alone, service providers operating through associated entities should continuously evaluate their structure against the four criteria listed above to ensure compliance.
If you’d like help navigating these rules, please feel free to reach out and book a free consultation. We offer free consultation to new clients to review your situation and advise how we can assist and add value. Visit our “Tax planning” and “Income tax return” for more details and resources.
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