IRD released a draft interpretation statement (PUB00301) last week to provide guidance on when the attribution rule under ss GB 27 to GB 29 applies.

The attribution rule was introduced some time ago to prevent taxpayers avoiding the top personal rate of tax. This was often done by creating an entity to derive income from the services of a working person, providing personal services to a third party. The rules only apply where certain threshold tests are met, and no exemptions apply.

This guidance provides a decision-making tree and various examples covering whether the rules apply or not. Key issues included are:

  • Whether the structure is an associated entity and working person relationship
  • Relevance if parties are non-residents
  • Whether a natural person is acting in that capacity i.e. not a partner in a partnership or a trustee of a trust
  • Whether it applies if the CFC rules are being used
  • How to determine whether there are substantial business assets

The statement does not cover any of the calculation rules

It is worth remembering that even in situations where the attribution rule criteria are not met, a taxpayer may still be subject to the general anti-avoidance provisions for diverting personal services income to a lower tax-rate entity.

The deadline for comment is 26 July 2018