ATO Interpretative Decision

ATO ID 2008/22 (Withdrawn)

Income Tax

• This ATO ID is withdrawn because it contains a view in respect of a provision of the Income Tax Assessment Act 1936 that does not apply after the 2011-12 income year. Despite its withdrawal, this ATO ID continues to be a precedential ATO view in respect of decisions for income years up to, and including, the 2011-12 income year.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

If the provision is otherwise satisfied, is a partner in a partnership that is a personal services entity that is not conducting a personal services business (PSB) entitled to the entrepreneurs' tax offset (ETO) under section 61-510 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of personal services income (PSI) that is attributed to the partner?

Decision

Yes. A partner in a partnership that is a personal services entity that is not conducting a PSB, is entitled to the ETO under section 61-510 of the ITAA 1997 in respect of PSI that is attributed to the partner if the provision is otherwise satisfied.

Facts

The partnership is not conducting a PSB.

The partnership's ordinary income is the PSI of the partner.

The partnership is a small business entity for the year and its aggregated turnover for the year is less than $75,000.

The partnership has net small business income for the year.

Reasons for Decision

Subsection 61-510(1) of the ITAA 1997 states:

You are entitled to a *tax offset for an income year if:

(a)

you are a partner in a partnership during the year; and

(b)

the partnership is a *small business entity for the year; and

(c)

the partnership's *aggregated turnover for the year is less than $75,000; and

(d)

the partnership has *net small business income for the year; and

(e)

your assessable income for the year includes a share (your net small business income share) of that net small business income.

•

denotes a term defined in section 995-1 of the ITAA 1997

In the present circumstances the partner satisfies paragraphs 61-510(1)(a) to 61-510(1)(d) of the ITAA 1997.

To satisfy paragraph 61-510(1)(e) of the ITAA 1997 the partner's assessable income must include a share of the partnership's net small business income.

Through the application of sections 86-15 and 86-20 of the ITAA 1997, the assessable income of the partner who performs the personal services includes the amount of ordinary income of the partnership that is the PSI of the partner, reduced by certain deductions to which the partnership is entitled. Pursuant to section 86-30 of the ITAA 1997, this amount does not form part of the assessable income of the partnership.

However, section 61-525 of the ITAA 1997, provides that an entity's net small business income is the amount by which the entity's small business entity turnover for the year exceeds the entity's deductions attributable to that turnover. Further, the small business entity turnover is the total ordinary income that the entity derives in the ordinary course of carrying on a business.

The provision of personal services by the partner for the partnership results in ordinary income derived by the partnership in the ordinary course of carrying on its business and is included in the partnership's small business entity turnover.

Therefore, while the PSI is not included in the assessable income of the partnership, it still forms part of the partnership's net small business income. As such, the amount included in the partner's assessable income under section 86-15 of the ITAA 1997 is a share of the net small business income of the partnership for the purposes of paragraph 61-510(1)(e) of the ITAA 1997.

Accordingly, the partner satisfies all the conditions under subsection 61-510(1) of the ITAA 1997 and is therefore entitled to the ETO.

Year of income:  Year ended 30 June 2008

Legislative References:
Income Tax Assessment Act 1997
   subsection 61-510(1)
   paragraph 61-510(1)(a)
   paragraph 61-510(1)(b)
   paragraph 61-510(1)(c)
   paragraph 61-510(1)(d)
   paragraph 61-510(1)(e)
   section 61-525
   section 86-15
   section 86-20
   section 86-30

Keywords
Personal services income
PSI attribution
Partnerships
Rebates and offsets

Business Line:  Small Business/Individual Taxpayers

Date of publication:  25 January 2008

ISSN: 1445-2782