ATO Interpretative Decision
ATO ID 2002/802
Income Tax
Alienation of Personal Services Income - Personal Services EntityFOI status: may be released
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This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is the taxpayer a personal services entity within the meaning of subsection 86-15(2) of the Income Tax Assessment Act 1997 ('ITAA 1997')?
Decision
Yes. The taxpayer is a personal services entity within the meaning of subsection 86-15(2) of the ITAA 1997.
Facts
The taxpayer is a company with two shareholders. Both shareholders and an unrelated third party are employees of the taxpayer. The taxpayer pays each employee an annual salary in monthly instalments.
The taxpayer has contracted to supply the three employees to a licensed dealer in securities ('the Dealer'). In turn the individuals have been appointed by the dealer as proper authority holders ('PAH') under subsection 94(2) of the then Corporations Act 1989. Under the contract the taxpayer receives commissions determined by reference to corporate advisory transactions as well as equity and derivatives business written by the individuals for the Dealer.
The three individuals perform the usual functions of a PAH for the Dealer. Contractually, the functions are performed in each individual's personal capacity and not as an employee of the taxpayer. The individuals are not entitled to any remuneration from the Dealer.
The taxpayer is not itself involved in advising clients or dealing in securities.
Reasons for Decision
A personal services entity is defined in subsection 86-15(2) of the ITAA 1997 as follows:
(2) A personal services entity is a company, partnership or trust whose *ordinary income or *statutory income includes the personal services income of one or more individuals.
Personal services income is defined under section 84-5 of the ITAA 1997 as follows:
84-5 Meaning of personal services income
(1) Your ordinary income or statutory 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 your personal efforts or skills (or would mainly be such a reward if it was your income).
Under the contract the taxpayer has been engaged to supply the Dealer with the individuals and it is the taxpayer and not the individuals who is entitled to payments of commission. The amounts received by the taxpayer, pursuant to the contract, constitute the ordinary income of the taxpayer within the meaning of section 6-5 of the ITAA 1997.
As the amounts received by the taxpayer are calculated by reference to corporate advisory transactions as well as equity and derivative business written by the individuals, the amounts received are mainly a reward for the personal efforts or skills of the individuals within the meaning of subsection 84-5(1) of the ITAA 1997. Accordingly the ordinary income of the taxpayer includes the personal services income of the individuals and the taxpayer is a personal services entity as defined in subsection 86-15(2) of the ITAA 1997.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 8 May 2015 | Facts | Update applicable Act |
| Legislative references | Insertion of section 6-5 ITAA 1997
The addition of the words "the then" before "Corporations Act 1989" for clarification purposes, as the act no longer exists in that form |
Year of income: Year ending 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 6-5
subsection 84-5(1)
subsection 86-15(2)
subsection 94(2)
Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/7
Taxation Ruling TR 2001/8
ATO ID 2002/803
ATO ID 2002/804
ATO ID 2002/805
Keywords
Alienation of personal services income
Assessable income of a personal services entity
Personal services income
PSE assessable income
ISSN: 1445-2782
| Date: | Version: | |
| 21 February 2002 | Original statement | |
| You are here | 8 May 2015 | Updated statement |