Edited version of your written advice

Authorisation Number: 1013110921471

Date of advice: 25 October 2016

Ruling

Subject: Personal services income

Question 1

Does the unit trust earn income mainly for providing services?

Answer

Yes.

Question 2

Is the income of the unit trust generated from a business structure?

Answer

No.

Question 3

Is the income of the unit trust PSI of any individuals?

Answer

Yes.

Question 4

Is the unit trust a personal services entity?

Answer

Yes.

Question 5

Would the unit trust pass meet the results test in respect of the individuals?

Answer

Yes.

Question 6

Would the unit trust be considered to be a personal services business?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Unit trust provides services.

The Unit trust has X unit holders.

The Unit Trust provides two groups to provide services.

The group members are the unit holders of the Unit Trust. As unit holders they are the principals of the entity (i.e. the Unit Trust).

The Unit Trust submits invoices to organisation Y on a monthly basis for their services.

The Unit Trust has full insurance coverage and the entity/directors are responsible for damage.

The main decision driver behind utilising a unit trust structure with the units held by discretionary trusts was to minimise risk and provide asset protection for the individuals involved.

The trust is paid a fixed price for service.

The trust will be paid the agreed amount irrespective on how long the job takes.

Bonuses may also be paid to the trust depending on the number of deliveries achieved.

Each group member is paid a percentage of the fixed total amount and they are not paid an hourly or daily rate for their services.

Assumption(s)

N/A

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

Anti-avoidance rules

The application of Part IVA of the ITAA 1936 has not been considered as this topic is in the MEI low risk PART IVA list as specified in ORCLA.

Reasons for decision

Does the Unit Trust earn income from mainly for providing services?

The Unit Trust does earn income from mainly providing services.

The Unit Trust provides two groups who are qualified to provide the service and carry out the required duties.

The group uses their knowledge and skills to perform the required duties.

Is the income from the Unit trust generated from a business structure?

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; or would mainly be such a reward if it was their income.

Only individuals can have personal services income.

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).

Where income is derived by a firm or practice which has substantial income producing assets, or many employees or both, the income is more likely to be generated by the profit-yielding structure of the business rather than from the rendering of personal services.

The distinction between income that is mainly a reward for personal efforts or skills of individuals 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

● the existence of goodwill

● the extent to which income-producing assets are used to derive the income

● the nature of the activities carried out

● the size of the operation and

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

The fact that services are performed through an entity does not automatically mean there is a business structure for the purposes of the PSI legislation. The factors listed above must be applied to each test person's particular circumstances to assess whether the income is generated from a business structure.

General rule of thumb for a practice company or trust

In determining whether the income of a practice company or trust is from a business structure and not from personal services income, the Commissioner will apply the following guidelines as a general rule of thumb:

● Where a practice company or trust has at least as many non-principal practitioners as principal practitioners, the income of the entity is considered to be derived from a business structure.

● Where a practice company or trust has fewer non-principal practitioners than principal practitioners, then whether the income is considered to be from a business structure will need to be determined by considering the various factors above.

For the purposes of applying this general rule:

● “Practitioners” include both full-time professional and non-professional staff who derives material fees for the practice. Part-time staff are counted proportionately. The term “practitioners” does not include administrative, clerical or support staff. For example, a nurse under the direction of a doctor or a legal secretary under the direction of a solicitor are not “practitioners” unless they earn material fees in their own right.

● “Principal practitioners” are those who own or share in the ownership of the practice, whether directly or indirectly.

“Non-principal practitioners” are those who are not “principal practitioners”; that is, who do not own or share in the ownership of the practice, whether directly or indirectly.

The income of the Unit trust is not generated from a business structure as all the group members are all unit holders therefore they are all principals and the requirements in IT 2006/39 are not met.

Is the income of the Unit trust PSI of any individuals?

Subsection 84-5(1) states that personal services income is income which is mainly a reward for an individual's efforts or skills (or would mainly be such a reward if it had been derived by the individual).

Under the contract the unit trust is required to provide two groups to provide the services. Each group member receives a percentage of the fixed total amount for the services they perform and provide in their designated role.

The income of the group is considered to be mainly a reward for the personal efforts or skills of each individual group member. Each group member therefore has their own personal services income.

Is the Unit Trust a personal services entity?

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

The Unit trust is a personal services entity because its ordinary and statutory income includes PSI individuals being the group who provide the services.

Would the income be for producing a result?

Subsection 87-18(3) of the ITAA 1997 provides that a personal services entity meets the results test in the relevant income year if, in relation to at least 75% of the personal services income of one or more individuals that is included in the entity's income for the year:

a) the income is for producing a result; and

b) the personal services entity is required to provide the equipment or tools necessary to do the work; and

c) the personal services entity is, or would be, liable for the cost of rectifying any defects in the work performed.

Paragraph 34 of Taxation Ruling TR 2001/8 Income tax: what is a personal services business states that a personal services entity or individual will meet the results test where:

a) the contract is to produce a specified outcome or result and payment is based on performance of the contract (i.e., for producing the outcome or result);

b) the entity or individual provides the equipment and tools, if any, necessary for doing the work; and

c) the entity or individual bears the commercial risks, including liability for defective work.

In considering the results test, regard must be had to the custom or practice as specified in subsection 87-18(4) of the ITAA 1997 which states:

For the purposes of paragraph (1)(a), (b) or (c) or (3)(a), (b) or (c), regard is to be had to whether it is the custom or practice, when work of the kind in question is performed by an entity other than an employee:

(a) for the personal services income from the work to be for producing a result; and

(b) for the entity to be required to supply the plant and equipment, or tools of trade, needed to perform the work; and

(c) for the entity to be liable for the cost of rectifying any defect in the work performed;

as the case requires.

The totality of the relationship between the parties will be relevant as to whether the contract is properly to be construed as one for the production of a result.

Would the income be for producing a result?

The Unit trust is paid a fixed amount for each job and each individual receives a fix percentage of the total amount depending on the success of the operation.

The trust will be paid the agreed amount irrespective on how long the job takes.

The group is not paid a daily or hourly amount for their efforts.

It is considered that each individual group member would be paid for producing a result.

It is expected that the other requirements of the results test would also be met.

Requirement that 75% of the income meets the results test

It is evident that in relation to at least 75% of the personal services income each unit holder derives:

a) the income will be for producing a result; and

b) the Unit Trust is required to provide the equipment or tools necessary to do the work; and

c) the Unit Trust is liable for the cost of rectifying any defects in the work performed.

The PSI of each individual would be for producing a result. It is considered that the other requirements of the results test would be met. Therefore, the unit Trust will pass the results test and will be conducting a personal services business. It will not be subject to the personal services income alienation rules.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).