Edited version of your written advice

Authorisation Number: 1012856629788

Date of advice: 11 August 2015

Ruling

Subject: Personal services income

Question and answer

Is the Trust a personal services entity?

No.

This ruling applies for the following period:

Year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Trust runs a health related clinic that operates both an online and on-site store in addition to running a specialist consultancy practice.

The business model and practice operation structure includes consultations with clients, conducting assessments, sending away samples for analysis, recommending products and conducting workshops

The Trust engages a consultant team and an administration teams consisting of:

Consultancy Team

• Person A - Full-time consultant [spouse of Person B]

• Part-time consultant

• Casual consultant

Administration Team

• Person B - Practice Manager [spouse of Person A]

• Assistant administrator

• Clinic administrator

The Trust, through the above team structure undertakes the following activities within the operational chain:

• Prepare invoices & receive payments for all practice income.

• Provision of office and practice equipment.

• Employs Administration Team to assist in conduct of the practice; by scheduling appointments, coordinating tests, calling for results, collection of fees from clients, typing of letters and record keeping, preparation of appointment files and request goods.

• Engages Practice Manager who supervises the daily operation of the practice, recruits staff and attends to oversight of admin functions such as book-keeping and payroll, authorises timesheets, employee payments & practice bill payments. Also manages/co-ordinates the online and on-site orders and deliveries.

• Pays for superannuation for all employees, arranging and paying appropriate insurances (work cover, public liability, product liability and professional indemnity for all employees), subscriptions, all health products and portion of home office running costs.

• Manages relationships with major suppliers of equipment and products.

• Research & development of products and refinement of services provided.

Fees charged to clients are in the form of a package; initial consult with consultant, testing, recommended plan and follow up appointment. All goods and subsequent check-up/appointment are paid on a per service basis.

The practice is located at the home of Person A and B due to its sizeable space. Several rooms and the garage are used in the running of the business. The house has prominent signage on the street, in parking areas and inside.

The practice attracts clients by way of public advertising including a website, social media, flyers, mail out distributions, local newsletters and banner signage in front of the house on a busy road.

There is a plan to lease commercial premises over the following months due to business expansion/growth.

There is goodwill and/or intellectual property built into the underlying business due to research projects being or to be conducted.

The business concept will be either saleable or increased in scale by looking into partnership or joint venture arrangements.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 84-5

Income Tax Assessment Act 1997 subsection 86-15(1)

Income Tax Assessment Act 1997 subsection 86-15(2)

Income Tax Assessment Act 1997 Division 87

Reasons for decision

Section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997) defines the personal services income of an individual as being income which is mainly a reward for that person's personal efforts or skills.

A personal services entity is a company, partnership or trust whose ordinary or statutory income includes the personal services income of one or more individuals (subsection 86-15(2) of the ITAA 1997).

If income is classified as personal services income, the individual or personal services entity will be subject to the personal services income alienation rules unless a personal services business determination is in force or the individual or entity meets at least one of the four personal services business tests (Division 87 of the ITAA 1997).

Where the alienation rules apply to an individual or a personal services entity, the amount of the personal services income is included in the assessable income of the individual whose personal efforts or skills generate the income (subsection 86-15(1) of the ITAA 1997).

Personal services income is to be distinguished from income that is mainly from any of the following:

• the use of assets (for example, a semi-trailer or bulldozer)

• the sale of assets (for example, trading stock)

• a business structure.

The Commissioner's view on what constitutes personal services income is contained in Taxation Ruling TR 2001/7 Income tax: the meaning of personal services income (TR 2001/7).

Paragraph 69 of TR 2001/7 states that income is not personal services income where it is derived by businesses that have a substantial profit-yielding structure.

The distinction between income that is mainly a reward for personal efforts or skills and income from a business structure will need to be made having regard to factors such as the:

• number of arm's length employees or others engaged to perform work,

• presence of goodwill,

• extent to which income-producing assets are used to derive the income,

• nature of the activities carried out,

• size of the operation, and

• extent to which the income is dependent upon a particular individual's own personal skills, efforts or expertise.

Where income is derived from a business structure, it would be expected that the income of the business is derived from the goodwill of the business (in attracting the custom) and the organisation of the businesses' human resources and tangible assets to produce the required services, and it is that which is rewarded rather than the personal efforts or skills of any one individual (paragraphs 97 to 100 of TR 2001/7).

In the case of the Trust, we note that:

• in addition to Person A and B, the practice also employs both a part-time and casual consultant along with an assistant administrator and clinic administrator,

• samples are sent away for analysis by an entity unconnected with the practice,

• the practice has or will build up goodwill and/or intellectual property;

• the practice is currently located in a residential property and takes up various rooms and areas of the dwelling;

• practice activities undertaken include consulting with clients, conducting workshops, retail sales and research and development,

• the practice is known to clients via its trading name through its website and social media and has prominent signage on the street, in parking areas and inside the house, and

• the practice may need to move to new premises due to the expected growth of the business.

Although Person A may be the key person and prime income producing individual of the practice, from the information provided, we consider that for the above reasons the income derived by the practice is generated primarily from the business structure and not any one individual.

Therefore, the income of the Trust does not include the personal services income of one or more individuals and the Trust is not a personal services entity.

Consequently, the personal services income alienation rules do not apply and consideration of the personal services business tests is not required.

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