Avoiding Tax Pitfalls: Understanding Income Attribution Rules
If you’re providing services through another entity, it’s important to understand the income attribution rules (“The Rules”). These rules exist to stop people from avoiding higher tax rates by diverting income to a different entity.
While structuring your work through a company can provide important legal benefits, (such as limited liability), it doesn’t mean you can save a lot of tax (as the tax rate can be lower). If attribution rules apply, the income is taxed as if you earned it personally.
When Do the Income Attribution Rules Apply?
These rules kick in when the following conditions are met:
You personally provide time, labour, or services.
You are associated with an entity (e.g., a company, trust, or partnership) that invoices for those services.
The entity provides services to a third party (the customer), and you personally perform the work.
Your net income from personal services exceeds $70,000 per year.
At least 80% of the entity’s income comes from one customer.
At least 80% of the entity’s income is earned by you or a relative.
Example: How the Rules Work
Let’s introduce Kaleb, who provides consulting services through his company, KMSR Limited to a third party. He’s the only shareholder and KMSR has no other customers.
Since more than 80% of KMSR’s income comes from one place and Kaleb personally provides the services, the income attribution rules will apply. This means Kaleb, and not KMSR, is taxed on the $100,000 of income.
Exemptions: When the Rules Don’t Apply
There are a few situations where these rules do not apply:
Non-Residents - if you and the entity both overseas for the required time
The services provided are essential support for a product supplied by the entity.
The entity has substantial business assets—valued at more than $75,000 or making up at least 25% of its annual income from services. These assets must be used at least 80% for business purposes.
The total attributed income is less than $5,000 for the tax year (this exception can only be used once).
What This Means for You
If you’re providing services through another entity and you’re unsure about your situation, seeking advice can help to manage your tax obligations
Disclaimer: This blog post is for informational purposes only and should not be relied upon as professional advice.