Under these arrangements, individuals provide services for which they don't directly receive payment. Instead payment is received by a company, trust or other entity. The income is then distributed to an SMSF, of which the individual is a member, to avoid paying tax at the personal marginal rate.
Significant penalties may apply if you participate in one of these schemes. These include penalties that may erode your retirement savings and losing your rights as a trustee to manage and operate an SMSF.
Below is a diagram outlining the arrangements:
These arrangements typically display all or most of the following features:
An individual performs services for a client for which the individual does not directly receive any (or adequate) consideration for the services provided. The client does not pay or remit funds to the individual directly; rather the client remits the consideration for, or in respect of, the services provided by the individual to a company, trust or other non-individual entity (entity). The entity may be an unrelated third party. The entity then distributes the income to a SMSF, of which the individual is a member, purportedly as a return on an investment of the SMSF in the entity. The trustee of the SMSF treats the income received as subject to a concessional rate of tax, or as exempt current pension income of the SMSF.