Edited version of private ruling

Authorisation Number: 1011558263561

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Ruling

Subject: Derivation of personal services income

Question

Is the entity conducting a personal services business on the basis of the unrelated clients test?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 2009

Relevant facts and circumstances

The personal services provider is operating through their entity.

The personal services provider through their entity works with a practice.

The personal services provider bills clients under their identification.

Payments when processed are transferred through the personal services provider's identification into the practice's account at the direction of the personal services provider for the entity. The personal services provider finds this easier for the administration of rent, advertising etc.

The entity receives income from the practice at a 60/40 split on the amount received from each client. Payments are received by the practice then 60% is distributed to the entity and 40% is kept by the practice for rental of premises and equipment, administration expenses, advertising to the public etc.

Invoices given to the clients will be from the practice.

The entity will invoice the practice.

The personal services provider for the entity does not get paid an hourly rate.

The personal services provider provides their own insurance.

The personal services provider for the entity will service half of their own clients and half of the other personal services providers at the practice when needed.

Each client is unrelated.

Clients of the personal services provider for the entity are mainly received by word of mouth.

Advertising is done directly to the public by the practice on the personal services provider's behalf and it notes the name of the personal services provider.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 84-5.

Income Tax Assessment Act 1997 section 87-15.

Income Tax Assessment Act 1997 section 87-20.

Income Tax Assessment Act 1997 section 87-65.

Reasons for decision

Personal services income

The measure contained in Divisions 84 to 87 of the Income Tax Assessment Act 1997 (ITAA 1997) only applies if a taxpayer has income that is personal services income (of an individual). The definition refers to income (including ordinary income or statutory income of any entity) that is mainly a reward for an individual's personal efforts or skills. Subsection 84-5(3) of the ITAA 1997 extends the definition of personal services income to income that is for doing work or for producing a result. The result must be produced from the individual's personal efforts or skills.

Whether income received by a taxpayer is personal services income (of an individual) is considered on a contract by contract basis.

Implicit in the word 'mainly' is that more than half of the relevant amount of the income is a reward for the personal efforts and skills of an individual.

The fact that the income is payable under a contract does not stop the income being mainly a reward for an individual's personal efforts or skills (subsection 84-5(4) of the ITAA 1997).

The personal services provider through their entity works with a practice.

Based on the information provided, the Commissioner is satisfied that your income from these services is mainly, that is more than half, a reward for the personal services provider's personal efforts or skills and is therefore their personal services income.

unrelated clients test

The unrelated clients test as set out in section 87-20 of the ITAA 1997 provides:

An individual or a personal services entity meets the unrelated clients test in an income year if:

· during the year, the individual or personal services entity gains or produces income from providing services to 2 or more entities that are not associates of each other, and are not associates of the individual or of the personal services entity; and

· the services are provided as a direct result of the individual or the personal services entity making offers or invitations (for example, by advertising), to the public at large or to a section of the public, to provide the services.

The individual or personal services entity is not treated, for the purposes of paragraph (1)(b), as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity.

You will meet the unrelated clients test in an income year if you have personal services income from two or more clients which are not associated with each other or with you, where those clients are obtained through offers to the public.

Please note:

Offers to the public

The test also requires that the personal services must be provided as a direct result of making offers to the public. This means that you must take active steps to offer your services to the public such as advertising and merely waiting for word of mouth offers of work will not be sufficient to pass the test. Making direct approaches to targeted potential clients does not meet the requirement either as the approach is to a particular entity and not to the public at large or a section of the public.

Under sub-section 87-20 (2) of the ITAA 1997, you do not count clients obtained by listing your name with a labour hire firm, placement agency or similar organisation because you are not treated 'as having made offers or invitations to provide services merely by being available to provide the services' through such an entity.

This is to be contrasted with the situation where a personal services entity makes offers or invitations to the public at large (e.g. by newspaper advertisement) as well as registering with a labour hire firm. The test would be met in this case if two or more unrelated clients engaged the personal services entity as a result of the advertisement.

Income Year ended 30 June 2009

You stated that:

· The personal services provider through their entity works with a practice.

· The personal services provider bills clients under their identification.

· Each client is unrelated.

Payments when processed are transferred through the personal services provider's identification into the practice's account at the direction of the personal services provider for the entity. The personal services provider finds this easier for the administration of rent, advertising etc.

The entity receives income from the practice at a 60/40 split on the amount received from each client. Payments are received by the practice then 60% is distributed to the entity and 40% is kept by the practice for rental of premises and equipment, administration expenses, advertising to the public etc.

Clients of the personal services provider for the entity are mainly received by word of mouth.

Advertising is done directly to the public by the practice on the personal services provider's behalf and it notes the name of the personal services provider.

On the basis of the information provided, the Commissioner is satisfied that the entity is providing services to two or more entities that are not associates of each other, and are not associates of the personal services provider or of the entity

The unrelated clients test requires that the personal services must be provided as a direct result of making offers to the public at large or a section of the public. The Commissioner considers that advertising meets this requirement as you are making the offers to the public. Therefore you can count the clients of the personal services provider for the entity seen at the practice for the purposes of the unrelated clients test in the 2008-09 income year.

From the information provided, less than 80% of your income from the personal services provider's services came from each client in the 2008-09 income year.

According to section 87-15 of the ITAA 1997, if less than 80% of your income in the income year is from each source, you may self-assess whether you are conducting a personal services business in relation to an individual's personal services income against the unrelated clients test. For the 2008-09 income year you are able to self assess on the basis of the unrelated clients test in relation to the personal services provider's personal services income because in the income year you have two or more unrelated clients obtained through direct approaches to the public and less than 80% of your income came from each source.

Whether or not you are conducting a personal services business, the personal services income is 'derived' by the individual who provides the services. Personal services income is only attributable to the individual's assessable income if the entity is not conducting a personal services business. As you are conducting a personal services business on the basis of the unrelated clients test, the personal services provider's personal services income does not need to be attributed to their assessable income. However it is 'derived' by them.

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