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Edited version of your written advice
Authorisation Number: 1013119062286
Date of advice: 3 November 2016
Ruling
Subject: Personal services income
Question
Is Company X subject to the personal services income alienation rules?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 201X
The scheme commences on:
1 July 201X
Relevant facts and circumstances
Individual X is a director and employee of Company X.
Company X has entered into an agreement with a foreign entity to provide its services as a consultant.
Individual X will provide the services by undertaking the role of a manager for the foreign entity's local operations.
The agreement specifies that the arrangement will continue for an indefinite period of time and that the foreign entity will pay Company X a monthly service fee of a set amount for the services provided.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 84-5
Income Tax Assessment Act 1997 Subsection 86-15(2)
Income Tax Assessment Act 1997 Section 87-15
Income Tax Assessment Act 1997 Subsection 87-18(3)
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.
In this case, Individual X is working as a manager and it is evident that the income he derives is mainly a reward for his personal efforts or skills and is therefore 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).
In this case, Individual X is providing their services to another entity through Company X. Therefore, Company X is a personal services entity as its income includes their personal services income.
A personal services entity will be subject to the personal services income alienation rules unless it conducts a personal services business. Under the alienation rules, the personal services income of a personal services entity is attributed to the individual or individuals who perform the work.
Section 87-15 of the ITAA 1997 provides that a personal services entity conducts a personal services business if:
● it meets the results test (section 87-18 of the ITAA 1997), or if not met;
● no more than 80% of the personal services income for the income year is from one source (i.e. the 80% rule is met) and it meets one or more of:
● the unrelated clients test;
● the employment test;
● the business premises test; or
● there is a personal services business determination in force.
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.
Income is for producing a result when the essence of the contract is to achieve a specific result and not to do work. The consideration often is a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked.
In this case, the foreign entity is paying a monthly service fee of a fixed amount over an indefinite period of time in exchange for the services provided by Individual X through Company X.
Therefore, Company X does not pass the results test. Further, as 100% of the personal services income is from one source (the foreign entity), the 80% rule is not met and no consideration of the other tests is possible.
Consequently, Company X is not conducting a personal services business and is subject to the personal services income alienation rules.
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