Money: It's all a matter of attribution

By DENHAM MARTIN

One of the amendments proposed in the Taxation (Annual Rates, GST and Miscellaneous Provisions) Bill is the introduction of an anti-avoidance rule - the attribution rule - which is focused on income from personal services.

This amendment is perceived by the Government to be necessary given the rise in the top personal tax rate to 39 per cent on income over $60,000 a year.

Currently, for example, a computer programmer ("C") could work directly for the acquirer of C's services `(`A"). If C earned $100,000, C would pay 39 per cent on income above $60,000.

However, C could work through a trust ("B") and B could provide the services to A. If C took a salary of $60,000 from B and B kept the balance of $40,000, B would only pay tax at 33 per cent, the trustee tax rate, on that balance. Consequently, the Government "loses" $2400 in tax (being 6 per cent of $40,000).

The attribution rule is designed to stop people who earn income from providing personal services from interposing an entity (which pays tax at a lower rate than themselves) between themselves and the recipient of their personal services.

The introduction of the attribution rule has been foreshadowed by the Finance Minister, Dr Cullen, although it is important to note that rule as drafted in the bill differs from what was initially suggested.The attribution rule provides that where during an income year A purchases services from B, and the services are performed by C, if C is an associate of B then C will be attributed with B's net income (subject to calculation in accordance with the bill).

However, the attribution rule will only apply where all of the following conditions are met:

80 per cent or more of B's income is from services provided to A or an associate of A; and

80 per cent or more of B's income comes from services personally performed by C or a relative of C; and

No substantial business assets are involved in deriving the gross income.

A point to noteis that there are two 80 per cent thresholds to be considered. Further, the concept of a relative and the concept of associated persons need to be properly considered. Both of these concepts have been defined for taxation purposes.

Another point that has been expanded upon is the concept of "substantial business assets." The bill provides that this term relates only to depreciable property, and not assets generally.

The term means depreciable property (like vehicles, plant, and machinery) that is not for private use and that cost more than either $75,000 or 25 per cent of B's annual gross income from services.

The attribution rule will apply regardless of the form the interposed entity takes - for example, a trust, company or partnership.

The structure of the interposed entity will identify how to determine the income that is to be attributed.

The desired aim of the attribution rule is that C will end up paying tax on the amount that he or she would have paid tax on had C's services been provided directly to A, instead of through B.

The attribution rule, if passed in its current form, will apply retrospectively from the beginning of the 2000-2001 income year. It will not apply if the amount to be attributed by B to C is less than $5000.

Also, where C's services are sold by more than one person (e.g. there is B1 and B2), then the attribution rule may be applied only once in respect of C.

Finally, two points should be noted:

First, the attribution rule is entirely separate from the 80 per cent test proposed in the Employment Relations Bill for deeming persons to be employees for the purposes of employment relations legislation.

Secondly, Australia is also introducing an attribution rule to stop avoidance of the top personal tax rates (although that has a different approach to attributing the income, particularly in relation to the ability to claim deductions).

* Denham Martin is the principal of Denham Martin and Associates, lawyers specialising in advice on taxation and related matters.