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Edited version of your private ruling
Authorisation Number: 1012442792336
Ruling
Subject: Part IVA of the Income Tax Assessment Act 1936
Question
Does part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply if profits are retained in the company?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
You are a consulting company. Your employees are the principal practitioner and a non-principal practitioner.
In the relevant year you received income from many different clients. The payments you received from these clients were payments for a result.
Relevant legislative provisions
Income Tax Assessment Act 1936 Part IVA
Reasons for decision
Taxation Ruling IT 2639 consolidates the views on the concept of income derived from rendering personal services and sets out factors for determining whether particular income constitutes income derived from personal services. If personal services income is derived then Taxation Ruling IT 2503 would apply.
Paragraph 7 and 10 of IT 2639 states;
In this Ruling "income from the business structure" refers to income other than "income from personal services". Income derived by a firm or practice which has substantial income producing assets, or many employees, or both, is more likely to be generated from the income yielding structure of the business rather than from the rendering of personal services.
For the purpose of determining whether a practice company or trust falls within the scope of IT 2503 (and only for that purpose), this Office will apply the following guidelines as a general rule of thumb:
a. If the practice company or trust has at least as many non-principal practitioners (see paragraph 11) as principal practitioners, then income is considered to be derived from the business structure (and therefore does not fall within the scope of IT 2503).
In your structure you have at least as many non-principal practitioners as principal practitioners therefore the income is considered to be derived from the business structure and the provisions of IT 2503 do not apply.
Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.
The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case.
Retaining profits in a corporate entity such as yours is a normal business practice and a 'tax benefit' (or part of a 'tax benefit') that has not been obtained, therefore Part IVA of the ITAA 1936 does not apply.
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