Edited version of private ruling

Authorisation Number: 1011755179846

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Ruling

Subject: Personal Services Income Loss

Questions

1. Is there personal services income in the 2009 income year?

2. Is your company conducting a personal services business in the 2009 income year?

3. Is a deduction for a net personal services loss allowable in the 2009 income year?

4. Is there personal services income in the 2010 income year?

5. Is your company conducting a personal services business in the 2010 income year?

6. Is a deduction for a net personal services loss allowable in the 2010 income year?

Answers

1. Is there personal services income in the 2009 income year?

Yes.

1. Is your company conducting a personal services business in the 2009 income year?

No.

1. Is a deduction for a net personal services loss allowable in the 2009 income year?

Yes.

1. Is there personal services income in the 2010 income year?

No.

1. Is your company conducting a personal services business in the 2010 income year?

No

1. Is a deduction for a net personal services loss allowable in the 2010 income year?

No.

This ruling applies for the following periods:

Income period ending 30 June 2009

Income period ending 30 June 2010

The scheme commences on:

1 July 2008

Relevant facts and circumstances

1. You have applied for a private binding ruling for the 2009 and 2010 income years.

2. You wish to know whether your company is conducting a personal services business and whether you are able to deduct the loss that it incurred in the 2009 and 2010 income years.

3. In the 2008 income year a contract was obtained by your company with a client (your client). This contract was to deliver services. Your application supplied a copy of the contract with your client.

4. Under the contract you were required to deliver the services. Under the contract access is available to your clients resources such as phones, organisation and computer services.

5. In the 2008 income year you provided services to your client through the company, you state that a small profit was made in that year.

6. In the 2009 income year the relationship between your company and the client deteriorated and whilst you performed work to meet the requirements of the contract, invoices issued by your company were not paid. Your company only had one client in the 2009 income year. A net loss was incurred as a result of income not being received.

7. In the 2010 income year you networked to obtain clients for your company however this met with no success, you have provided an estimate of the amount expended to fund expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 84-5,

Income Tax Assessment Act 1997 86-20 and

Income Tax Assessment Act 1997 86-27.

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.

The personal services work undertaken by you is providing services in a particular field to clients. The personal services work produced income and resulted in your company making a net profit in the 2008 income year, in the 2009 income year whilst work was performed no income was received as the invoices issued to your client were not paid.

In the 2010 income year you networked to find clients for your company without success. In that year you did not perform any personal services work.

2009 Income Year

Based on the information provided, the Commissioner is satisfied that in the 2009 income year your company was producing or attempting to produce personal services income as a result of your personal efforts or skills, based on the performance of the services and the invoices issued. This is so despite the fact that the invoices issued to your client were not paid.

2010 Income Year

In the 2010 income year your company was not in receipt of personal services income as it had no clients in that year. Accordingly there was no amount in the 2010 income year that was mainly a reward for your personal efforts or skills.

Personal Services Business

A relevant factor in whether a loss in the entity is available to be claimed by the individual is whether a personal services business is being conducted in the relevant year of income.

If your company is not conducting a personal services business then losses could be eligible for deduction under section 86-27 of the ITAA 1997. For your company to be a personal services business it is necessary that either that the results test is passed or less than 80% of your personal services income is from one source and any of the business premises, employment test or unrelated clients test are passed; or for a Personal Services Business Determination to have been issued for a year of income.

2009 Income Year

As all of your income is from one source in the 2009 income year you are unable to self assess under the business premises, employment test or unrelated clients tests. There is no Personal Services Business Determination in force for any of the years in question. Accordingly the only test needing consideration is the results test.

To meet the requirements of the results test under subsections 87-18(3)(a)-(c) of the ITAA 1997 an entity such as your company, must have income paid for a result, be responsible for supplying the tools and equipment needed to produce the result and be financially responsible for the cost of fixing defects. That is all three requirements must be met.

Information provided shows that your company's only client, was contractually obliged to supply tools and equipment needed to carry out the contract. Accordingly the requirements of the results test could not be met as your company was not required to supply all the tools and equipment needed to produce the result.

As the results test is not passed, more than 80% of your personal services income is from one source and there is not a Personal Services Business Determination in force, your company is not conducting a personal services business in the 2009 income year.

2010 Income Year

In the 2010 income year there was no personal services income, a precondition for considering whether there is a personal services business.

Therefore your company was not conducting a personal services business in the 2010 income year.

Deduction for Personal Services Loss

Section 86-27 of the ITAA 1997 states the requirements that must be met for an individual taxpayer to be able to deduct a net personal services income loss of an entity from other income.

Section 86-27 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that

If your personal services deduction amount exceeds your unreduced personal services income, then you can deduct the excess amount. For this purpose:

(a)                 your personal services deduction amount is the amount of deductions relating to your personal services income worked out under step 1 of the method statement in section 86-20, increased by the amount (if greater than zero) worked out under step 4 of the method statement; and

(b)                 your unreduced personal services income is the personal services income that would have been included in your assessable income for the income year if there had not been any reduction under section 86-20.

For section 86-27 of the ITAA 1997 to apply, there need to be amounts worked out in accordance with the method statement in section 86-20 of the ITAA 1997. Section 86-20 is a provision attributing income where an entity is not conducting a personal service business.

In the 2009 income year your company was not conducting a personal service business but was conducting activities that would be expected to generate personal services income. Accordingly a personal services loss would be available for deduction in under section 86-27 of the ITAA 1997.

Therefore, any personal services income loss incurred by your company in the 2009 income tax year can be deducted in your return.

In the 2010 income year there was no personal services income producing activities undertaken by your company. This is unlike the situation in 2009 where income producing activities had been undertaken and income was expected but not received by your company. In the absence of any personal services income there could not be a personal services income loss to be deducted under section 86-27 of the ITAA 1997. This conclusion is reinforced as once there is no personal services income there would be no amount calculated under section 86-20 of the ITAA 1997.

Summary

A personal services loss is available to be deducted in your personal return in the 2009 income year. Any loss incurred by your company in the 2010 income year would not be a personal services income loss and not be allowable as a deduction in your personal return.

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