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Edited version of your private ruling

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Ruling

Subject: Residency & Personal Services Income

Questions and answers:

Many consultants and contractors operate as a sole trader or through a company, partnership or trust. In many cases, the income received for the work they do may be classified as personal services income (PSI).

To work out if your income is PSI, you first need to work out what percentage of the income you receive from each contract you complete is for:

· labour - that is, the skills, knowledge, expertise or efforts of the person who performed the services, or

· the materials supplied and/or tools and equipment used to complete the job. If the majority (more than 50%) of your income is for the skills, knowledge, expertise or efforts of the person who performed the services, this income will be classified as PSI.

The Relevance of Personal Services Income

The alienation measure only applies to income earned mainly from the provision of an individual's labour or skills (personal services income) rather than being generated by the use of assets, the sale of goods, the granting of a right to use property or by a business structure.

By definition, income earned by an employee is personal services income. However, the measure does not apply to employees, except where an individual is an employee of an interposed entity.

The alienation measure will not apply where the income is earned in the course of conducting a personal services business. The meaning of personal services business is explained in Taxation Ruling TR 2001/8.

You will not be within the alienation measures and can self-assess accordingly if you come within one of the following four situations, a per Section 87-5 of the ITAA 1997:

You satisfy the 'results test', that is:

If you cannot satisfy any of the tests outlined in the previous paragraph (for example, because you do not meet one of the three personal services business tests, or the results test, and 80% or more of your personal services income is from one source), you may be able to obtain a Personal Services Business Determination (PSBD) from the Commissioner that you are conducting a personal services business.

You can also apply for a PSBD if you are not sure whether you satisfy any of the tests. If the Commissioner is satisfied that you are entitled to a PSBD, you will not be subject to the alienation measure.

Even if an amount of income is personal services income, the alienation measure will not apply where that personal services income is earned in the course of conducting a personal services business (i.e., where you meet one of the tests in paragraph 6 or you have a PSBD).

In your case, you work as a consultant in your area of expertise and plan to start conducting this work as a sole trader to Australia clients.

You estimate that 80% of your time is spent using your knowledge, skills and expertise in your consultancy work. In order to perform your work, 20% relates to the use of other resources.

Therefore, when conducting your consultancy skills as described, more than 50% of your income earning activities relates to the use of your skills, knowledge, expertise or efforts, any income received from these activities will be considered Personal Services Income.

You had one overseas client whilst conducting this consultancy work, thus receiving 80% or more of your income from one client. You were paid an hourly rate and as such do not satisfy the results test.

You may apply for a Personal Services Business Determination if you do not believe the alienation measures should apply to your personal services income.

Further issues for you to consider:

You can apply for a PSBD online at ato.gov.au. instructions and the relevant form are contained online and can be found by entering "Personal services business determination" in our search box.

Personal services income in the 2012 income tax assessment needs to be declared by following the steps contained on our website. To access these steps you can type into our search box: 14 - Personal services income (PSI) 2012.


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