Attribution rules on personal services income

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Attribution rules on personal services income

Many taxpayers are unaware that income derived by a company or a trust may in reality be derived by them personally.

This particularly impacts people who derived 80% or more of their income from one source such as contractors.

Personal Services Attribution (PSA) rules are an anti-avoidance measure that can deem income derived by a company or a trust to be derived by the individual shareholder or beneficiary.

Income is attributed when:

  • 80% or more of the entity’s income from personal services is derived from services performed by an associate or 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 a customer
  • Your net income exceeds $70000 per annum (including any attribution amounts), and
  • Substantial business assets are not a necessary part of the business structure.

For contractors this area can be particularly fraught. Often contractors derive 100% of their income from one source for an extended period of time. They contract as a limited liability company and hold 100% of the shares in the company.

In this situation they are likely to be caught by the PSA rules. The net personal services income from the company is likely to be attributed to the shareholder. The IRD do this to ensure that taxpayers cannot avoid paying the top marginal rate of tax.

This means that income would be taxed at 33% rather than the company rate of 28%. If income is significant, there can be quite a large amount of tax to pay along with any penalties and interest.

Of course if the contractor derived income from 2 or more sources that meant that no one source of income was above 80%, the PSA rules would not apply.

However, there is case law (Penny & Hooper) where the Supreme Court of New Zealand held that income arising from a taxpayer’s personal efforts should effectively be taxed in their own hands.

This advice is general in nature. If you think attribution rules might apply in your circumstance, please don’t hesitate to call us for confidential advice.

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