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Ruling
Subject: Personal Services Income - Unrelated Clients Test
Question
Whether the PSE passes the unrelated clients test?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2010,
Year ended 30 June 2011, and
Year ended 30 June 2012.
The scheme commences on:
1 July 2009
Relevant facts and circumstances
The PSE contracts to provide the consulting services of the test individual to their own clients.
The main consulting services provided by the test individual include being a chairman of a board, an ombudsman for a local council and acting as a consultant in relation to various government related projects.
During the relevant income years the PSE contracted to the following entities and performed the following roles:
· Entity 1 - Executive Officer
o through word of mouth referrals the PSE was approached approximately a decade ago for providing the test individual's services as Executive Officer.
· Entity 2 - Ombudsman
o at some time during the 200X income year, the PSE submitted a quote responding to a public tender for the Ombudsman role.
o at some time during the 200Y income year the PSE's tender was accepted for the test individual to become an Ombudsman for an initial period of years.
o at some time during the 200Z income year Entity 2 extended the PSE's contract a further period of years.
o information provided shows the PSE also performed consulting services during the relevant income years.
· Entity 3 - Chairman of Working Group
o on several occasions since 200Z, the PSE was engaged via word of mouth referrals to provide the consultancy services of the test individual.
o the PSE was invited to Chair a working group in relation to a specific development.
o at some time during the relevant income year at an ordinary Council meeting it was held that the test individual Chair the above working group.
· Entity 4 - Venture A - Independent Chairman
o as a result of word of mouth referrals, the PSE accepted a formal written invitation from Entity 4 at some time during the 200Y income year for the test individual to preside as Independent Chairman of the Venture A Board.
o information provided shows the PSE held this contract for the relevant income years.
At some time during the 20XX income year the PSE contracted again to Entity 4.
· due to the rapport built over the years with Entity 4, the PSE was invited again at some time during the 20XX income year to assist with another project by having the test individual presiding as Independent Chairman of the Venture B Board.
At some time during the relevant income year the PSE contracted to Entity 5 as Chairman of Committee A.
· the PSE expressed an interest for the test individual to undertake the role of becoming Chair of Committee A, which it successfully obtained as a result of several phone conversations, correspondence and a meeting.
All contracts of services negotiated between the PSE and the above entities were conducted on an arm's length basis.
The above entities are all unrelated and are not associates of one another or the test individual.
The PSE did not receive more than 80% of its income from one entity.
The test individual does not work in the capacity as an employee for any of the above entities.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 87-20
Reasons for decision
The PSE meets the unrelated clients test for the relevant income years as:
· during the period, the PSE gains or produces income from providing services to two or more entities that are not associates of each other, and are not associates of the individual or of the PSE; and
· the services are provided as a direct result of the individual or personal services entity making offers or invitations, to the public at large or to a section of the public, to provide the services.
The PSE contracted to five unrelated entities, obtained through word of mouth referrals, public tender, contract extensions, formal written invitations from clients and expressions of interest. We consider these methods of obtaining work demonstrate that the services provided to those entities were provided as a direct result of making offers or invitations to the public at large or to a section of the public.
We have also determined that the work obtained through contract extensions or subsisting relationships also satisfies the requirements of the unrelated clients test. When making our decision we considered the following factors:
· the number of persons or entities to which the offer or invitation is made. While not determinative, it is likely to be a public offer or invitation if more entities are involved;
· the nature and content of the offer or invitation. Where the offer or invitation is made as part of a competitive commercial process, such as a public tender, a prior relationship may not detract from the offer being made to the public;
· the nature of the particular relationship between the parties to the offer or invitation. Where the parties to the relationship deal with each other on an arm's length basis, the commercial character of the transaction is maintained. Accordingly, the fact that an individual or personal services entity may have worked for/provided services to an entity sometime in the past does not necessarily operate to exclude the individuals or personal services entity from satisfying this test.
Therefore, as the PSE contracted to two or more unrelated entities and the services were provided as a direct result of the individual or personal services entity making offers or invitations, to the public at large or to a section of the public, the PSE passes the unrelated clients test.
As the PSE also passes the 80% rule they are able to self assess against the unrelated clients test to determine whether the PSE is a Personal Services Business. If the PSE determines that they are a personal services business, the personal services income rules will not apply.
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