| A question arises about the nature of a payment | | | | primary purpose of receiving a tax benefit. If |
| made to a business for personal services | | | | your business structure is found using this |
| rendered by an employee. This is especially when | | | | scheme, you may have to pay all of the back |
| the arrangement is viewed as income splitting to | | | | taxes and face heavy penalties. |
| avoid higher taxes. Splitting income is a practice | | | | Examples: |
| aimed at avoiding higher income tax rates by | | | | |
| sharing the income paid for the personal efforts | | | | 1. Arrangements where personal services income |
| and skills of a taxpayer with another associate or | | | | is paid to your business and taxed at a lower rate |
| family member. | | | | than if you had received the income yourself. |
| Income splitting is a tactic used to avoid high | | | | 2. If you split personal services income with an |
| income tax rates by distributing the income paid | | | | associated person or with another entity |
| for the personal efforts and skills of a taxpayer | | | | associated with you, and your associate did not |
| with another person who did not contribute | | | | perform genuine services to earn it. |
| reasonable effort to earn that income. The | | | | 3. When you use a family trust or company to |
| concept usually applies to personal services | | | | split personal services income with family |
| income. | | | | members like your spouse. |
| Income splitting is prohibited under the general | | | | To avoid penalties for income splitting, if you want |
| anti-avoidance provisions of Part IVA of the | | | | to operate a partnership or pay salaries to family |
| Income Tax Law. In many instances, the ATO | | | | members, your arrangements should have |
| and courts considered an arrangement as income | | | | commercial basis and not be intended primarily to |
| splitting when the scheme is entered into for the | | | | obtain a tax advantage. |