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Edited version of private ruling

Authorisation Number: 1011696325753

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Ruling

Subject: Personal Services Income - Business Premises test

Question 1

Whether the income is personal services income?

Answer

Yes.

Question 2

Whether the business premises test is met?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Facts

A company (you) has applied for a Private Binding Ruling for the 2011 income years.

You have applied for a Private Binding Ruling in relation to the personal services income an individual generates through you as a result of the provision of services. You seek a ruling on whether you meet the requirements of the business premises test.

You, through the individual, provide services to two clients.

The scheme or arrangement is as follows:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 84-5,

Income Tax Assessment Act 1997 Section 87-30 and

Income Tax Assessment Act 1936 Section 318.

Reasons for decision

Detailed reasoning

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 the provision of services in a particular field.

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

You seek a ruling on whether the requirements of the business premises test in the personal services income legislation are met.

Business Premises Test

The business premises test as set down in section 87-30 of the ITAA 1997 provides:

All of the conditions must be met for the business premises test to be satisfied.

Maintain and use

The Explanatory Memorandum to the Alienation of Personal Services Income Act 2000 states at paragraph 1.97:

The context in which the word maintained is used merely requires that the individual or personal services entity keeps in existence or continuance, preserves or retains the business premises. There is no requirement that the individual or personal services entity bear running costs associated with the premises such as cleaning or utility costs.

At all times in the income year

For the purposes of the business premises test the phrase at all times in the income year is taken to mean the whole period during which activities are conducted for the purposes of generating personal services income.

The test requires the individual or personal services entity to have business premises on each day during the income year in which activities are conducted which produces the individual's personal services income.

Where the individual or personal services entity commences or ceases activities during the income year, it is sufficient that the individual or personal services entity maintains and uses business premises for that part of the income year in which the activities are conducted. There is no requirement for the individual or personal services entity to maintain the use the same business premises throughout the whole year.

Business premises at which the individual or entity mainly conducts activities producing personal services income

Paragraph 87-30(1)(a) of the ITAA 1997 requires that the individual or entity mainly conducts activities at those business premises from which personal services income is gained or produced. The use of the word mainly means the generation of personal services income must be the primary usage to which the business premises are put. More than 50% of the activities conducted at the business premises by the individual or entity must be directed at producing personal services income.

Exclusive use of business premises

Where premises are occupied under ownership or lease, the legal nature of the proprietary interest allows the holder to determine who may or may not enter upon the premises. An individual or personal services entity who occupies their premises under ownership or lease may ensure others do not use the premises and, therefore, have exclusive use in the relevant sense.

In the case of joint lessees, neither lessee has exclusive use of the premises. This is confirmed by the Explanatory Memorandum to the Alienation of Personal Services Income Act 2000 which provides:

Occupancy by way of ownership or lease is to be contrasted with occupancy by way of licence or possession. With each of the latter, the individual or personal services entity does not have a proprietary interest in the land which allows the individual or personal services entity to ensure that others may not use the premises.

An individual or personal services entity cannot have exclusive use of premises if they do not have exclusive possession of those premises. If an owner of premises grants permission for an individual or personal services entity to occupy premises on such terms that the agreement amounts to a licence and not a lease, the owner may also use the premises as he/she sees fit and as such the individual or personal services entity cannot be said to have exclusive use of the premises. What the individual or personal services entity has is exclusive use of the premises against all parties except for the owner.

Physically separate

The business premises have to be physically separate from any premises used for private purposes of the individual, the personal services entity or an associate of the individual or entity.

Your case

You have provided the following information in support of your application.

· The premises are an office in a commercial office building which is owned by a third party who rents the premises to you through a real estate agent on a normal commercial basis.

· The premises are mainly used for personal services work as the individual uses the premises to provide services on your behalf.

· You have exclusive use of the premises.

· The premises are physically separate from the private residence of the individual and physically separate from the business address of your clients.

From the information provided you meet all the requirements of the business premises test. The premises are of the type that are normally used for business purposes, you have exclusive use of the then, they are mainly used for personal services work, they are physically separate from premises used for private purposes by you or your associates and the premises are physically separate from the premises of your clients.

Accordingly you satisfy the requirements of the business premises test as set out in section 87-30 of the ITAA 1997


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