Edited version of your written advice

Authorisation Number: 1013057959599

Date of advice: 21 July 2016

Ruling

Subject: Proposed restructure of the Practice

Question 1

Is the income of the Practice 'personal services income' of the principle practitioners for the purposes the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

7 June 2016

Relevant facts and circumstances

The Practice is currently owned and operated by three principle individual professional practitioners (IPP) in partnership.

The trustee for the Practice Service Trust (the Unit Trust) provides services to the partnership in relation to the Practice. Three discretionary trusts, connected to the IPPs, are the unit holders of the Unit Trust.

The IPPs proposes that the trustee of the Unit Trust will become the trading entity and owner of the Practice. The partnership and previous service arrangement will cease, and the current name of the Unit Trust will be changed. The Unit Trust is a legally effective trust. Under the proposed structure, the IPPs will retain a beneficial interest in the firm.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 2-42

Income Tax Assessment Act 1997 subsection 84-5(1)

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

Income Tax Assessment Act 1997 subsection 86-15(4)

Reasons for decision

Summary

It is the Commissioner's view that the income derived by the Practice is generated from the income yielding structure of the business. As such, the income of the Practice is not PSI of the principle practitioners for the purposes of the ITAA 1997.

Detailed reasoning

Under the personal services income (PSI) alienation measure in Part 2-42 of the ITAA 1997, PSI is defined as the ordinary income or statutory income of an individual, or the ordinary income or statutory income of any other entity, if the income is mainly a reward for the personal efforts or skills of the individual (subsection 84-5(1)).

As such, the ordinary income or statutory income of a company, partnership or trust may include income that is PSI of one or more individual (subsection 86-15(2) of the ITAA 1997).

Paragraph 29 of Taxation Ruling TR 2001/7 Income tax: the meaning of personal services income (TR 2001/7) explains that the meaning of PSI is wider than that which might otherwise be the case under the common law. Some examples (from paragraph 50) include:

• salary or wages;

• income from a professional person practising on his or her own account without professional assistance;

• income payable under a contract which is wholly or principally for the labour or services of a person;

• income derived by consultants, for example, computer consultants or engineers from the exercise of personal expertise.

Where the entity pays the individual's PSI to the individual as an employee, as salary or wages, by the due date, the alienation measure will not apply (subsection 86-15(4) of the ITAA 1997).

Paragraph 29 of TR 2001/7 also explains that an entities income will not be PSI where it is mainly:

• from the entity supplying goods or granting a right to use property;

• generated by assets the entity holds; or

• generated by the business structure of the entity.

Taxation Ruling IT 2639 Income tax: personal services income (IT 2639), at paragraph 7, explains that income derived by an entity that 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 by any individual professional practitioner (IPP). Paragraph 8 explains four factors to be considered, although no one factor is determinative.

• The nature of the taxpayer's activities

The activities of salary and wage earners and IPPs practising on their own account clearly generate PSI. However, some IPPs (such as radiologists or pathologists) that operate on their own account often employ many technical staff and operate an array of technical equipment. Their income is generated from the business structure rather than from their rendering of personal services.

• The extent to which the income depends upon the taxpayer's own skill and judgment

The more income producing activities involve the exercise of the individual's own skill and judgment the more probable it is that the income will be derived from personal services rather than from business structure.

• The extent of the income producing assets used to derive the income

The more substantial the income producing assets employed within the practice the more likely it is that the income of the practice will be derived from the business structure. However, minor equipment would not suffice to change what would otherwise be PSI.

• The number of employees and others engaged in providing the activities

The more substantial the number of employees, practitioners or technicians used in the practice the more probable it is that the income is derived from the business structure rather than from the rendering of personal services by one or more IPP. For example, large accounting and legal firms with tens, or even hundreds, of practitioners but without extensive or substantial equipment would also be considered to be generating their income from their business structure.

Application to your circumstances

Under the current and proposed structure, three IPPs provide services to clients for and on behalf of the Practice and remain actively involved in the management of the practice. The IPPs are not paid salary or wages as employees. Considering the factors identified in IT 2639:

• The IPPs are not practicing on their own. zz additional staff are engaged by the Practice as employees - six are directly involved in income generating activities, and seven support staff provide critical services to the practitioners and the Practice's financial and administrative operation.

• In the 20xx financial year X% of the practice income was generated through providing medical services to patients, and the IPPs generated less than half of the income (Y%). On average, in the past three years each IPP has generated Z% of the practice income.

• The Practice derives a small amount of income as rent and for use of the treatment room.

• zz additional employees are active in providing the services of the Practice.

It is the Commissioner's view that the above reflects that the income derived by the Practice is generated from the income yielding structure of the business.

As such, the income of the Practice is not PSI of the principle practitioners for the purposes of the ITAA 1997.

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