ATO Interpretative Decision

ATO ID 2002/805

Income Tax

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

Issue

Does the taxpayer satisfy the employment test in section 87-25 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision

No. The taxpayer does not satisfy the Employment Test contained in section 87-25 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 as proper authority holders ('PAH') under subsection 94(2) of the 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 relevant 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 three individuals are the only entities that the taxpayer engages to perform work.

The taxpayer is not itself involved in advising clients or dealing in securities.

Reasons for Decision

The employment test is set out in section 87-25 of the ITAA 1997. Subsection 87-25(2) deals with personal services entities and provides as follows:

(2) A personal services entity meets the employment test in an income year if:

(a)

the entity engages one or more other entities to perform work, other than:

(i)

individuals whose personal services income is included in the entity's *ordinary income or *statutory income; or

(ii)

*associates of the entity that are not individuals; and

(b)

that other entity performs, or those entities together perform, at least 20% (by market value) of the entity's principal work for that year.'

The Commissioner's views on categorising each item of ordinary income as the personal services income of an individual (or otherwise) are set out in Taxation Ruling TR 2001/7 (see paragraphs 44 and 45).

The commission entitlements of the taxpayer represent discrete items of ordinary income and each item of ordinary income is mainly a reward for the efforts or skills of a particular individual. Therefore, each item of commission income to which the taxpayer becomes entitled must be tagged as the personal services income of one of the individuals. To whom a particular item of commission income is to be tagged depends upon whose efforts or skills were involved in generating the income for the Dealer and the consequential commission entitlement of the taxpayer.

Each of the individuals have discrete amounts of personal services income included in the ordinary income of the taxpayer Paragraph 87-25(2)(a)(i) of the ITAA prevents an individual who earns personal services income from being included for the purposes of the employment test.. As the taxpayer does not engage any other entity to perform work the taxpayer is unable to satisfy the employment test in section 87-25 of the ITAA 1997.

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   subsection 84-5(1)
   section 87-25

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

Related ATO Interpretative Decisions
ATO ID 2002/2
ATO ID 2002/3
ATO ID 2002/4

Keywords
Alienation of personal services income
Personal services income
PSBD unusual circumstances employment test
PSBD unusual circumstances unrelated clients test

Siebel/TDMS Reference Number:  DW222212

Business Line:  Small Business/Individual Taxpayers

Date of publication:  22 August 2002

ISSN: 1445-2782