INCOME TAX ASSESSMENT ACT 1997

CHAPTER 2 - LIABILITY RULES OF GENERAL APPLICATION  

PART 2-42 - PERSONAL SERVICES INCOME  

Division 86 - Alienation of personal services income  

Subdivision 86-A - General  

SECTION 86-20   Offsetting the personal services entity ' s deductions against personal services income  

86-20(1)  
The amount of your *personal services income included in your assessable income under section 86-15 may be reduced (but not below nil) by the amount of certain deductions to which the *personal services entity is entitled.

Note 1:

Subdivision 86-B limits a personal services entity ' s entitlement to deductions.

Note 2:

If the amount of the deductions exceeds the amount of the personal services income, a deduction for the excess is available to you under section 86-27 . The personal services entity cannot deduct the amount of the excess: see section 86-87 .

86-20(2)  


Use this method statement to work out whether, and by how much, the amount is reduced: Method statement

Step 1.

Work out, for the income year, the amount of any deductions (other than *entity maintenance deductions or deductions for amounts of salary or wages paid to you) to which the *personal services entity is entitled that are deductions relating to your *personal services income.


Step 2.

Work out, for the income year, the amount of any *entity maintenance deductions to which the *personal services entity is entitled.


Step 3.

Work out the *personal services entity ' s assessable income for that income year, disregarding any income it receives that is your *personal services income or the personal services income of anyone else.


Step 4.

Subtract the amount under step 3 from the amount under step 2.

Note 1:

Step 4 ensures that, before entity maintenance deductions can contribute to the reduction, they are first exhausted against any income of the entity that is not personal services income.

Note 2:

If the personal services entity receives another individual ' s personal services income, see section 86-25 .


Step 5.

If the amount under step 4 is greater than zero, the amount of the reduction under subsection (1) is the sum of the amounts under steps 1 and 4.


Step 6.

If the amount under step 4 is not greater than zero, the amount of the reduction under subsection (1) is the amount under step 1.

EXAMPLES
Example 1:

Continuing example 1 in section 84-5 : Assume these additional facts:

  • · $120,000 of NewIT ' s income is Ron ' s personal services income;
  • · NewIT has deductions (including superannuation contributions) of $50,000 relating to Ron ' s personal services income (step 1);
  • · NewIT has entity maintenance deductions of $8,000 (step 2);
  • · NewIT has investments that produce income. NewIT ' s assessable income, disregarding Ron ' s or anyone else ' s personal services income, is $20,000 (step 3).
  • Because the step 4 amount is less than zero ( - $12,000), step 5 does not apply and, under step 6, the amount of the reduction is $50,000. Therefore the amount included in Ron ' s assessable income is:


    $120,000   -   $50,000   =   $70,000

    Example 2:

    Assume, as an alternative set of facts, that NewIT ' s assessable income under step 3 was only $2,000.

    The step 4 amount would have been $6,000, and, under step 5, the amount of the reduction would have been $56,000 (adding the amounts under steps 1 and 4). The amount included in Ron ' s assessable income would then have been:


    $120,000   -   $56,000   =   $64,000

    Note:

    The personal services entity ' s deductions that do not relate to your personal services income and that are not entity maintenance deductions cannot reduce the amount included in your assessable income under section 86-15 .


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