Topics on Personal Service Income (7) – Ariss’s Case (1)

The decision of the AAT in Ariss’s case

In Ariss’s case, the AAT held that money generated by the taxpayer’s activities as an IT consultant and split between the taxpayer and his wife via a third-party trust arrangement, was in fact PSI and directly assessable to the taxpayer.

The facts in Ariss’s case

1. Mr Ariss (‘the taxpayer’) was a highly skilled IT specialist. He had a unique set of skills with respect to Oracle software, particularly in the enterprise management area, which put him in demand with clients. It was not in dispute that the taxpayer attracted the work and was the main point of contact with the client.

1. The taxpayer was assisted by Mrs Ariss (‘his wife’), who worked under his supervision and instruction but was never formally engaged as an employee. He operated out of a dedicated home office that was not used for any other purpose. A laptop belonging to each client would be used to access the client’s respective network (for security purposes), while any research tasks would be undertaken on laptops belonging to the taxpayer.

1. At some time prior to the 2006 income year, the taxpayer and his wife became associates of Agency Resource Management Services (Global) Trust (‘ARMS’). The taxpayer entered into an arrangement with ARMS to reduce the administrative burden of running his business and to simplify his business administration.

1. Under the arrangement, the taxpayer advised ARMS of the number of hours that he had worked for each client, at which point ARMS invoiced the clients, withheld PAYG and superannuation contributions, and then allocated an income split of 70% to 30% between the taxpayer and his wife after deducting an administration fee. ARMS only acted as directed by the taxpayer.

1. Despite the 70/30 income split between the taxpayer and his wife, the taxpayer’s wife did not actually receive any (cash) payments by way of distributions. Instead, payments were received into the bank account of the taxpayer’s business. This meant that the taxpayer ultimately received a tax benefit from the arrangement, in the form of lower taxable income, and reduced liability for income tax.

1. The taxpayer was paid a daily rate and although he described himself working on “projects”, his work was not dependent on project completion. He was paid regardless of the stage any “project” was at. Also, a payment was never delayed if a project was not completed, and he did not remedy any defaults at his expense.

1. In each of the relevant income years, the taxpayer and his wife lodged tax returns declaring the distributions paid from ARMS as trust income which were the amounts invoiced by ARMS to the clients for work undertaken by the taxpayer.

1. The ATO conducted an audit of the remuneration received by the taxpayer for the provision of his in respect of the 2010, 2012 and 2013 income years. Following this audit, the ATO issued amended assessments based on the trust distribution being solely attributed to the taxpayer as salary and wages.

1. The taxpayer objected to each of the amended assessments which were denied in full. The taxpayer sought a review of the objection decision by the AAT.

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• Topics on Personal Service Income (1) – Overview of the PSI Rules (1)
• Topics on Personal Service Income (2) – Overview of the PSI Rules (2)
• Topics on Personal Service Income (3) – Overview of the PSI Rules (3)
• Topics on Personal Service Income (4) – Fortunatow’s Case (1)
• Topics on Personal Service Income (5) – Fortunatow’s Case (2)
• Topics on Personal Service Income (6) – Fortunatow’s Case (3)
• Topics on Personal Service Income (8) – Ariss’s Case (2)
• Topics on Personal Service Income (9) – Douglas’s Case