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Authorisation Number: 1012382482731

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Ruling

Subject: Personal Services Income: the Unrelated Clients Test

Questions

Is the income personal services income?

Is the unrelated clients test met?

Answers

Is the income personal services income?

Yes.

Is the unrelated clients test met?

No.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts

The company applied for a private ruling for the 2009-10, 2010-11 and 2011-12 financial years. The application states that the company is seeking clarification of its position in relation to the personal services income 'unrelated clients test'.

The test individual ('the Individual'), for the company subsequently withdrew the company's application for a private ruling in relation to the 2009-10 financial year

The Individual provides their professional services on behalf of the company.

The Individual has over 25 years experience in their field. Most of the work is obtained through referral, personal recommendations and the Individual's personal contacts.

At present, and in recent years, most of the work in the Individual's field is associated with large companies. The company's clients are international companies, who prefer to contract the company's services through recruitment agencies.

The company also contracts directly with smaller companies for a limited amount of work.

The Individual is not an employee of any agency and the company invoices agencies (rather than the client to which the Individual's services are provided) because the clients prefer to contract for services through agencies. The Individual has always assumed that the company met the unrelated clients test.

In the application for a private ruling, and in additional information provided in response to a request from the ATO, the Individual advised the following:

In the relevant financial year the company received income through two recruitment agencies, Recruitment Company A and Recruitment Company B, and received income directly from Industrial Company A. The Individual states that none of these entities are associates of each other, or of theirs or their company.

The entity the Individual was working for whilst contracted through Recruitment Company A was Industrial Company A.

The entity the Individual was working for whilst contracted through Recruitment Company B was Industrial Company B.

The company obtained the contract with Industrial Company A through answering an on-line advertisement placed by Recruitment Company A. The initial contract was for a period of weeks after which the company was engaged in different assignments and paid directly by Industrial Company A.

The company obtained the contract with Industrial Company B through 'word-of-mouth'. The Individual organised an official interview via Recruitment Company B but knew that they had already been accepted for the position with Industrial Company B. The contract with Industrial Company B was a number of times.

In the subsequent financial year, the company received income through two agencies, Recruitment Company C and Recruitment Company B and directly from Industrial Company C. The Individual states that none of these entities are associates of each other, or of theirs or their company.

The entity the Individual was working with whilst contracted through Recruitment Company B was Industrial Company B.

The entity the Individual was working with whilst contracted through Recruitment Company C was Industrial Company B. Recruitment Company C is a recruitment agency part-owned by Industrial Company B. The Individual states they found another assignment within Industrial Company B at the expiry of the previous contract but was required to use a recruitment agency (they chose to use Recruitment Company C).

The Individual obtained work with Industrial Company C in the subsequent year through 'word-of-mouth' and making direct contact with the company.

Figures were provided that represented the percentages of income derived from the above sources in the years in question and how the positions were obtained.

Reasons for decision

Personal services income (PSI)

The measures contained in Divisions 84 to 87 of the ITAA 1997 only apply if a taxpayer has income that is personal services income (of an individual). The definition refers to income (including ordinary 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 services provided are professional services.

Based on the information provided the Commissioner is satisfied that the company's income from professional services provided by the Individual is mainly a reward for the Individual's personal efforts or skills and is therefore personal services income.

Alienation of personal services income

Division 86 of the ITAA 1997 has the effect of attributing a personal services entity's income from the personal services of an individual to that individual unless the income is promptly paid to the individual as a salary (subsection 86-5(2)) or the income is from the personal services entity conducting a personal services business (subsection 86-15(3) of the ITAA 1997).

Personal services business

Pursuant to section 87-15 of the ITAA 1997, a personal services entity conducts a personal services business if:

· it meets the results test (as set out in section 87-18 of the ITAA 1997);

· no more than 80% of the personal services income for the income year is from one source (i.e. the 80% rule is met) and it meets one or more of:

· the unrelated clients test (as set out in section 87-20 of the ITAA 1997)

· the employment test (as set out in section 87-25 of the ITAA 1997)

· the business premises test (as set out in section 87-30 of the ITAA 1997);

· or

· there is a personal services business determination in force.

Unrelated clients test

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

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

a) 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

b) 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.

(2) 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.

Making offers or invitations

What is meant by 'making offers or invitations'?

For the purposes of paragraph 87-20(1)(b), making an offer or invitation to the public in general or to a section of the public is an indication by the individual or personal services entity of their willingness to perform services for anyone within a group or class of persons or to any member of the public. The intention of the individual or personal services entity in such activity is to attract or solicit members of the public to enter into agreements for their services. Relevant activities, such as advertising, points to the commerciality and independence of the enterprise conducted by the individual or the personal services entity.

As the meaning of the phrase 'making offers or invitations' is not given in the ITAA 1997, for the purposes of the unrelated clients test the meaning is based on the ordinary usage of the terms and may include a wide variety of activities, including word of mouth attempts to attract general business.

The Macquarie Dictionary defines an offer as 'to present for acceptance or rejection; to put forward for consideration; to propose or volunteer; to make a proposal or suggestion; a bid; etc.

An invitation is the mechanism by which an individual or personal services entity holds out to or informs the public or a section of the public the services that the individual or personal services entity is able to provide. The Macquarie Dictionary defines invitation as "to attract, allure or tempt." An invitation may be made in written or spoken form.

Advertising is an example of making an offer or invitation to the public given in the legislation. The ordinary meaning of the word 'advertise' is 'to make generally or publicly known, or to give public notice of'. Advertising may be effected by providing information to the public, by the making of public announcements, by publications in periodicals or professional journals, by printed posters, by broadcasting over the radio, television, Internet etc, or by placing an advertisement in a newspaper, magazine, or business directory.

Other types of activities or actions that are considered to be 'making offers or invitations' in this context include:

· public tender;

· maintaining an Internet web site on which the availability of services are advertised; and

· word of mouth referrals

What is meant by 'to the public or a section of the public'

An offer or invitation is made to 'the public at large' where any interested member of the public is capable of accepting it.

An offer or invitation to 'a section of the public' is made in situations where only a select group is chosen to whom the invitation is made. Making an offer or invitation to a 'section of the public' could include offering to provide services to one entity, for example in relation to competitive tenders.

Relevant year

80% rule

You have advised that in the relevant financial year the company provided the services of the Individual to three clients; Recruitment Company A, Recruitment Company B and Industrial Company A.

As the company had income from two or more separate entities with not more than 80% of their income derived from one source, the company meets the 80% rule for this financial year.

Unrelated clients test

1. Working at Industrial Company A through Recruitment Company A

You advised you obtained this position by answering an advertisement Recruitment Company A had placed on a website. This position was not obtained as a result of making offers or invitations to the general public or a section of the public.

2. Working at Industrial Company A through direct contract

You have advised you obtained this position by striking a deal with the Industrial Company A director, whilst working there under contract to Recruitment Company A. This position was not obtained as a result of making offers or invitations to the general public or a section of the public.

3. Working at Industrial Company B through Recruitment Company B

You have advised you heard through word-of-mouth that this job was going to be advertised. You knew you would be accepted: we presume this indicates you contacted the company and were assured you would be appointed if you went through an official interview with Recruitment Company B. This position was not obtained as a result of making offers or invitations to the general public or a section of the public.

Subsequent year

80% rule

You have advised that in the subsequent financial year the company provided the services of the Individual to Recruitment Company C, Recruitment Company B, Industrial Company C and Industrial Company A.

As the company had income from two or more separate entities with not more than 80% of their income derived from one source, the company meets the 80% rule for this financial year.

Unrelated clients test

4. Working at Industrial Company B through Recruitment Company B

As per 3. above

5. Working at Industrial Company B under Recruitment Company C

You were invited to engage in another contract when the original contract had finished. You were contracted through an alternative recruitment agency. This position was not obtained as a result of making offers or invitations to the general public or a section of the public.

6. Working directly with Industrial Company C

You heard about the possibility of working with Industrial Company C through 'word-of-mouth' and made direct contact with the company. This position was not obtained as a result of making offers or invitations to the general public or a section of the public.

7. Working directly with Industrial Company A

As per 2. above

Conclusion

In both years, the company passed the 80% rule. However it does not pass the unrelated clients test in either of those years.

Relevant legislative provisions

Subsection 84-5(3) of the Income Tax Assessment Act 1997

Subsection 86-5(2) of the Income Tax Assessment Act 1997

Subsection 86-15(3) of the Income Tax Assessment Act 1997

Section 87-15 of the Income Tax Assessment Act 1997

Section 87-18 of the Income Tax Assessment Act 1997

Section 87-20 of the Income Tax Assessment Act 1997

Subsection 87-20(1) of the Income Tax Assessment Act 1997

Section 87-25 of the Income Tax Assessment Act 1997

Subsection 87-65(4) of the Income Tax Assessment Act 1997

Subsection 97-65(5) of the Income Tax Assessment Act 1997

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