Edited version of private advice

Authorisation Number: 1052398709910

Date of advice: 06 August 2025

Ruling

Subject: Personal service income - payments to associates

Question 1

Can the taxpayer claim a deduction for wages paid to their spouse for work performed under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes, as long as the employment is bona fide and the amount is reasonable for the purposes of section 26-35 of the ITAA 1997.

Question 2

Can the taxpayer claim a deduction for superannuation contributions made on behalf of their spouse for work performed under section 290-60 of the ITAA 1997?

Answer 2

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a medical professional.

You provide private consulting services under your ABN, providing medical assessment reports regarding specified matters.

The work is referred to you, no contract exists between you and the clients.

You charge per report for these services as defined by the industry standards.

You have engaged the services of your spouse, a medical professional.

Your spouse has knowledge and experience relevant to the medical assessment work that you provide in your private consulting services.

Due to your spouse qualifications, you have engaged them to assist with non-principal work providing proof reading, critiquing and revision of the medical assessment reports you have prepared for your private consulting services.

Your spouse is not currently remunerated for providing these services to you.

You would like to begin to remunerate your spouse for providing these services either as an employee or on contract via their ABN and claim a business deduction for these payments and associated on-costs.

You have consulted Fair Work and they have suggested an appropriated award that would cover the work being performed by your spouse. You have planned to remunerate your spouse under the award suggested by Fair Work, for the work your spouse has provided in relation to your private consulting services.

You have self-assessed as a Personal Service Business (PSB) having met the results test.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 85-20

Income Tax Assessment Act 1997 section 85-25

Income Tax Assessment Act 1997 section 85-30

Income Tax Assessment Act 1997 section 26-35

Income Tax Assessment Act 1997 section 290-60

Reasons for decision

Summary

Based on the information provided, you can claim a deduction for wages paid to your spouse and for superannuation contributions made on their behalf in respect of the work that your spouse has performed in their capacity as your employee, provided that you are conducting a personal services business, the employment is bona fide, the payment is reasonable, incurred in the course of gaining or producing your assessable income and the conditions regarding employer's superannuation contributions in section 290-60 of the ITAA 1997 are met.

Detailed reasoning

Deductions for wages

Subsection 8-1(1) of the ITAA 1997 provides as follows:

1)             You can deduct from your assessable income any loss or outgoing to the extent that:

a)             it is incurred in gaining or producing your assessable income; or

b)             it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

However, paragraph 8-1(2)(d) of the ITAA 1997 limits the operation of subsection 8-1(1) of the ITAA 1997 as follows:

2)             2) However, you cannot deduct a loss or outgoing under this section to the extent that:

.....

d)             a provision of this Act prevents you from deducting it.

Payments to associates

Part 2-42 of the ITAA 1997 contains the special rules for the tax treatment of personal services income (PSI) earned by sole traders including contractors and consultants. In particular, Division 85 specifies limits on an individual's entitlements to deductions relating to the individual's personal services income.

PSI is income that is mainly a reward for an individual's personal efforts or skills.

Section 85-20 of the ITAA 1997 prevents an individual earning personal services income from deducting any payment made to an associate or any amount arising from an obligation to such associate to the extent it relates to gaining or producing the individual's personal services income unless the payment is for principal work.

The term principal work is not defined in the ITAA 1997 but its meaning is discussed in Taxation Ruling TR 2022/3 at paragraph 26 as:

'Principal work' is work carried out by an individual or a personal services entity that is central to meeting obligations under an agreement with the service acquirer. Principal work does not include associated clerical or administrative work (such as bookkeeping and answering phones), unless the principal work is administrative in nature.

An 'associate' has the same meaning as in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). For an individual it includes their spouse or relative.

As stated earlier, Division 85 of the ITAA 1997 limits certain deductions that an individual earning personal services income can claim. However, section 85-30 of the ITAA 1997 provides that Division 85 does not apply to an amount, payment or contribution to the extent that the amount, payment or contribution relates to income from conducting a personal service business.

A taxpayer conducts a personal services business if the taxpayer meets at least one of the four personal services business tests in the income year. The four personal services business tests are:

•                the results test

•                the unrelated clients test

•                the business premises test, and

•                the employment test.

Reducing deductions for amounts paid to related entities

Section 26-35 of the ITAA 1997 provides that if a taxpayer is allowed a deduction for a payment made, or a liability incurred, to a related entity, such as a spouse, the taxpayer can only deduct so much of the amount as the Commissioner considers reasonable. Any amount that is paid in excess of the reasonable amount is not deductible to the taxpayer.

Section 26-35 only applies if the taxpayer is allowed a deduction under another provision of the ITAA 1997 or ITAA 1936 for a payment or liability incurred. If the taxpayer is not allowed a deduction, section 26-35 is not relevant.

In determining what is a reasonable payment for the purposes of section 26-35, the Commissioner has regard to commercial rates of pay for comparable services.

Deductions for superannuation contributions

A taxpayer can claim a deduction under section 290-60 of the ITAA 1997 for a contribution to a complying superannuation fund for the purpose of providing superannuation benefits for an employee if certain conditions in subdivision 290-B of the ITAA 1997 are satisfied.

Section 290-60 of the ITAA 1997 provides that:

(1)           You can deduct a contribution you make to a superannuation fund, or an RSA, for the purpose of providing superannuation benefits for another person who is your employee when the contribution is made.

(2)           However, the conditions in sections 290-70, 290-75 and 290-80 must also be satisfied for you to deduct the contribution.

Superannuation contributions on behalf of associates

The deduction for superannuation contributions on behalf of associates are denied or limited under section 85-25 of the ITAA 1997 on the same basis as deductions are generally denied for payments to associates under Division 85, unless the taxpayer is conducting a personal services business. Section 85-25 of the ITAA 1997 provides that:

(1)           You cannot deduct under this Act a contribution you make to a fund or an RSA to provide for superannuation benefits payable for your associate, to the extent that the associate's work for you relates to gaining or producing your personal service income.

(2)           Subsection (1) does not stop you deducting a contribution to the extent that your associate's performance of work forms part of the principal work for which you gain or produce your personal services income.

However, as stated earlier, section 85-30 of the ITAA 1997 provides that Division 85 which limits deductions against personal services income does not apply to an amount, payment or contribution to the extent that the amount, payment or contribution relates to income from the taxpayer's conducting a personal service business.

Application to your circumstances

The income for medical assessment reports you provide is mainly a reward for your personal efforts and skills. The income derived is your personal services income.

You intend to employ your spouse to assist with proof reading, critiquing and revision of your draft reports. Your spouse is not undertaking principal work. The work performed by them is considered to be ancillary to the principal work by which you derive your personal services income.

As stated earlier, section 85-30 of the ITAA 1997 provides that Division 85 restrictions on deductions relating to personal services income does not apply to an amount, payment or contribution to the extent that the amount, payment or contribution relates to income from you conducting a personal services business (PSB).

You have self-assessed as a PSB having met the results test in relation to your private consulting work in the relevant income year.

You therefore will not be subject to Division 85 of the ITAA 1997 relating to your personal services income. Normal business deduction rules apply to your expenditure. Therefore, under sections 8-1 and 26-35 of the ITAA 1997, you are able to deduct a reasonable amount for the wages paid to your spouse for the work they perform, as long as the employment is bona fide and the outgoing incurred in the course of gaining or producing your assessable income.

You have consulted Fair Work to determine an appropriate award classification for the work performed by your spouse. Based on their recommendation of the most relevant award, and taking into account your spouse's competency and skills, the technical complexity of the reports, and the high level of accuracy required for proofreading, the classification appears to be suitable for the nature of the work involved.

Based on the information provided and your explanation, it is considered that, in this instance, the proposed payment rate would be reasonable for the purposes of section 26-35 of the ITAA 1997.

It is advisable to keep sufficient records in terms of hours worked, duties and rates of pay for the work your spouse performs for you.

Also, as you are conducting a PSB, the deduction for superannuation contributions for your spouse is not affected by section 85-25 of the ITAA 1997. Provided that all conditions in section 290-60 of the ITAA 1997 are satisfied, you can claim a deduction for superannuation contribution made on behalf of your spouse in respect of the work done by them as your employee, that supports your gaining or producing your assessable income.