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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private ruling

Authorisation Number: 1011635449250

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

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Ruling

Subject: Personal Services Income and Carried Forward Losses

This ruling applies for the following periods:

Period ending 30 June 2010

Period ending 30 June 2011

Period ending 30 June 2012

The scheme commences on:

1 July 2009

Relevant legislative provisions

Income Tax Assessment Act 1997 84-5

Income Tax Assessment Act 1997 87-18(3)

Income Tax Assessment Act 1997 87-20

Income Tax Assessment Act 1997 87-30

Income Tax Assessment Act 1997 87-40

Income Tax Assessment Act 1997 165-10

Income Tax Assessment Act 1997 165-12

Income Tax Assessment Act 1997 165-13

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A company (you) has applied for a Private Binding Ruling for the 2009-10, 2010-11 and 2011-12 income years.

You have applied in relation to the personal services income an individual generates through you as a sales agent for goods. You seek a ruling on whether you meet the requirements of the unrelated clients test as a result of the special rules applying to agents. You also want a ruling on whether losses incurred as a result of prior activities selling the goods as a principal are able to be carried forward and used in the 2009-10, 2010-11 and 2011-12 income years on the basis that the continuity of ownership test is met.

You have previously carried on a business of selling the goods as principal and now are selling the goods as agent for a principal.

The scheme or arrangement is as follows:

You advise that with respect to carried forward losses that the shareholders and their respective shareholdings and rights have been the same since incorporation and will remain the same in the recoupment years.

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.

You stated that the personal services work undertaken by the individual is sales of goods.

Based on the information provided, the Commissioner is satisfied that your income from sales commissions is mainly a reward for the individuals personal efforts or skills and is therefore personal services income.

Agents test and unrelated clients test

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

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.

Agents test

Section 87-40 of the ITAA 1997 modifies the operation of the 80% rule and unrelated clients test for certain agents. The provisions of the section are:

Agent has its ordinary meaning of acting for or representing another. A common law agent has an authority or capacity to create or affect legal relations between a principal and third parties. Generally speaking, what a person may do himself, the person may do by an agent.

The information provided shows that under the arrangement:

Therefore subsection 87-40(2) of the ITAA 1997 is satisfied and you will meet the unrelated clients test under section 87-20 of the ITAA 1997 and the 80% rule under subsection 87-15(3) of the ITAA 1997 on the basis of the agents test in the 2009-10, 2010-11 and 2011-12 income years.

Carried forward losses

Pursuant to section 165-10 of the ITAA 1997 a company cannot deduct a tax loss unless it passes either of the following tests:

Section 165-12 of the ITAA 1997 states that during a period known as the ownership test period, which is the period from the start of the loss year to the end of the income year, the following is required for the continuity of ownership test to be passed:

Your application states that the same shareholders held or will hold the voting power over all of the shares for the period from when the losses were incurred until they are expected to be recouped. Your application also states that the same shareholders held or will hold all of the rights to dividends and rights to capital distributions in respect of the shares, for the period from when the losses were incurred until they are expected to be recouped.

Information provided shows that you satisfy the continuity of ownership test as the requirements of section 165-12 of the ITAA 1997 are met for all of the shares with regard to voting power, rights to dividends and rights to capital distributions for the ownership test period. Therefore, you may deduct carried forward losses incurred in prior years in the 2009-10, 2010-11 and 2011-12 income years.


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