Personal service income and attribution rule

The attribution rules apply when a taxpayer who earns income from personal services inserts an associated entity between the working person and the party purchasing those services. These are specific anti-avoidance rules which prevent higher income earners from diverting personal services income to other associated entities such companies, trusts and look-through companies (LTCs).

Income is attributed when:
· 80% or more of the entity’s income from personal services is derived from services personally performed by an associated person or a relative,
· 80% or more of the entity’s income from personal services is derived from the sale of services to a customer or a person associated with the customer,
· the person’s net income for the income year exceeds $70,000, including any amounts available for attribution, and
· Substantial business assets are not a necessary part of the business structure used to derive the entity’s assessable income.
“Substantial business assets” are depreciable property that cost more than $75,000 or, make up at least 25% of the associated entity’s total assessable income from services for the income year and are not for private use.

The IRD’s intention is to prevent taxpayers from avoiding paying tax at the highest individual tax rate of 33%. Please seek professional advice if you think that this rule apply to you.

Disclaimer: The following answer necessarily sets out general principles only. The facts of particular cases always need to be considered carefully, and it may be necessary to obtain advice from a tax expert.

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