ATO Interpretative Decision

ATO ID 2002/560

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

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:

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.

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:

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

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.

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1936
   section 318

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/7
Taxation Ruling TR 2001/8

Keywords
PSI non employees deductions entitlements
PSE deductions entitlements

Business Line:  Centres of Expertise Alienation

Date of publication:  31 May 2002

ISSN: 1445-2782