ATO Interpretative Decision
ATO ID 2002/560
Income Tax
Alienation of Personal Services Income -payments to an associateFOI status: may be released
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Can a company claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for payments to an associate for bookkeeping services against personal services income, if these bookkeeping services do not form part of the principal work of the company?
Decision
No, a deduction is not allowable under section 8-1 of the ITAA 1997. Payments to associates for work that is not part of the principal work of the personal services entity cannot be offset against personal services income that is subject to the alienation measure.
Facts
The company is a consultancy business.
The company derived 100% of it's income for the year ended 30 June 2001 from one source.
The company's income was derived for the personal services of an individual.
The company is not conducting a Personal Services Business.
The company paid an associate for bookkeeping services.
The company does not have a Personal Services Business Determination in force.
Reasons for Decision
Personal Services Income is defined in Section 84-5 of the ITAA 1997 as:
'Your ordinary income or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for you personal efforts or skills (or would mainly be such a reward if it was your income).'
The company's consultancy contract for the year ended 30 June 2001 falls within the definition of personal services income because the income is mainly a reward for the personal efforts of skills of an individual.
Section 8-1(1) of the ITAA 1997 states that:
'You can deduct from your assessable income any loss or outgoing to the extent that:
Section 8-1(2) of the ITAA 1997 states that:
'However, you cannot deduct a loss or outgoing under this section to the extent that:
Section 86-60 of the ITAA 1997 refers to deduction entitlements for a personal services entity. Subsection 86-60(a) of the ITAA 1997 restricts the deductibility of amounts that relate to the gaining or producing of personal services income to the deduction that an individual would have been entitled to claim.
Division 85 of the ITAA 1997 specifies limits on the deductions that are available to individuals and section 85-20 specifically refers to the deductibility of payments to associates. The word 'associates' has the same meaning as in section 318 of the Income Tax Assessment Act 1936.
Under subsection 86-60(b) of the ITAA 1997, a personal services entity can deduct an amount to the extent that it relates to the gaining or producing of personal services income where the personal services entity is carrying on a personal services business (PSB).
In order for the company to be conducting a PSB the company would need to have a written notice to that affect from the Commissioner in accordance with section 87-65 of the ITAA 1997 or be able to satisfy the results test. The company does not have a Personal Services Business Determination in force pursuant to sub division 87-A of the ITAA 1997 and does not satisfy the results test for the year ended 30 June 2001.
Section 85-20 of the ITAA 1997 denies a deduction for payments made to an associate unless it relates to work that forms part of the "principal work" for which the company gains or produces the personal services income. "Principal work" is the work that is central to fulfilling the obligations of the contract for which the company derives it's personal services income.
Bookkeeping is not considered to be part of the principal work of the company as it is not work required to be performed under the terms and conditions of the contract from which the company derived it's personal services income. Accordingly, a deduction is not allowable for the payments made by the company to an associate for bookkeeping services.
Date of decision: 26 October 2001Year of income: Year ended 30 June 2001
Legislative References:
Income Tax Assessment Act 1936
section 318
section 8-1
section 85-20
paragraph 86-60(b)
section 86-65
section 87-65
Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/7
Taxation Ruling TR 2001/8
Keywords
PSI non employees deductions entitlements
PSE deductions entitlements
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 26 October 2001 | Original statement |
| 25 July 2008 | Archived |