• What is income from a business structure?

    If your income is derived by a business which has substantial income-producing assets, many employees, or both, it is more likely to be generated from the profit-yielding structure of the business rather than from your personal services.

    1. The more substantial the income producing assets used by your business the more likely it is that the income is from the business structure rather than from your personal services.
    2. The more substantial the number of employees, practitioners or technicians engaged by a business the more likely it is that the income is from the business structure rather than from your personal services.

    To assist you in making the distinction between income from a business structure and PSI, you should consider all relevant circumstances, including the following factors as they relate to your business:

    • the extent to which the income is not dependent upon a particular individual's own personal skills, efforts or expertise
    • number of arm's length employees or others engaged to perform work
    • presence of goodwill
    • extent to which income-producing assets are used to derive the income
    • nature of the activities carried out
    • size of the operation.

    If, after weighing up the above factors, you can conclude the income is mainly generated from a business structure, the income is not PSI.

    The examples below are taken from existing taxation rulings.

    Example

    Bob owns an earthmoving company, Bob's Earthworks Pty Ltd, with assets including two trucks, a backhoe tractor and small grader. The company has six employees, five of whom are plant operators. Bob is employed by Bob's Earthworks Pty Ltd as the managing director and he also performs some of the principal work that generates the income of his company.

    The assets that are operated by the other employees are the means by which the company generates its income even though the plant operators use their personal skills to contribute to income production. The income of the company is not reliant on the skills of any one individual; it can derive income as long as it owns or has access to the necessary equipment. Therefore the income is not Bob's PSI.

    Example

    John is a partner in a large accounting partnership which has 20 partners and 200 employees. As a partner, John's income from the partnership flows from property, namely, his proprietary interest in the partnership. That interest is an interest in, among other things, the profit derived by the partnership as a whole; that is, in the profits generated by the other partners and employees from custom attracted by the goodwill of the partnership, and use of the partnership assets. When a partner participates in profits generated not merely in law, but as a commercial reality, from the efforts of the entire firm, it is properly attributed to the taxpayer's interest in the business structure or organisation of the partnership (which is his capital).

    Accordingly, as a partner in the partnership, John's income is income of a business structure rather than his own PSI.

    End of example
      Last modified: 14 Sep 2016QC 17521