Edited version of private advice

Authorisation Number: 1051859575366

Date of advice: 16 November 2021

Ruling

Subject: Payments to an associate

Question

Are you able to deduct a reasonable amount for the wages paid to an associated person for the administrative duties they perform?

Answer

Yes.

Section 26-35 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that when making a payment to a related entity, such as a spouse, you can only deduct so much of the amount as the Commissioner considers reasonable.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

XX XXXX 20XX

Relevant facts and circumstances

A is a registered medical professional of over X years.

A works in general practice, with extensive qualifications in his area of expertise.

A regularly travels throughout Australasia to present research and educate other healthcare providers.

A receives income as an employee from B. A also receives Personal Services Income (PSI) through C. A consults at D, E and F.

C is the entity paid by D, E, F.

D - contract date X; commencement date X

•         Service arrangement to provide the practitioner with reception, nursing staff, provision and maintenance of equipment (with the exception of auriscope and stethoscope) medical supplies, billing, accounting, premises (including dedicated room) (Schedules 1 and 2).

E - contract date X; commencement date X

•         Service arrangement to support practitioner's medical practice with provision of premises, reception, equipment, technician staff, accounting, marketing, cleaning, other facilities and services (Clause 5).

F - contract date X; commencement date X

•         The taxpayer company is engaged to provide radiology services as required (Schedule)

•         C is paid $X per hour.

The contracts with D and E are services agreements only.

Payments to C were made from G and H for lectures/presentations etc.

C did not enter into contracts to provide these services. A is well known for being an expert in A's field, so is often referred to for presentations/lectures in this area.

The work was received from word of mouth, G contact the taxpayer to see if he has time available to make presentations etc.

Payments for the year ended 30 June 20XX:

Income (excl GST) Percentage of Income

D $X X%

E $X X%

F $X X%

Total $X 100.00%

There are many administrative type duties required in the running of C. These duties include:

•         co-ordinating work schedules, start and finish times at D, E and F and other work sites when necessary

•         managing/preparing journal articles, medical reports, teaching sessions and medical presentations as required

•         reconciliation of patient billings and service fees for D and E

•         invoicing for Imaging Queensland and other entities as required

•         managing outstanding accounts

•         bookkeeping and payroll services for C

•         managing pay and work schedules for B medical income

•         managing administration for first aid requirements

•         Medicare compliance

•         Continuing Medical Education (CME) points and medical registrations such as AHPRA; and

•         other general administrative duties - mail, emails and filing responsibilities.

I is a registered nurse. I is also experienced in medical practice management and medical administration.

The employment contract between I and C stated the employment title is an administration assistant, with a commencement date of X or later if agreed by both parties. It is estimated that I will be required to work approximately X hours per week and be paid $X per hour. I will work X weeks per year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 26-35

Reasons for decision

Summary

Yes.

A payment for wages to an associate is an allowable deduction where you are conducting a personal services business (PSB) and satisfy one of the personal services income (PSI) rules.

PSI is income that is mainly a reward for an individual's personal efforts or skills.

To be eligible to claim a deduction for payments made to an associate in the 20XX income year, the personal services entity (PSE), C (the company), needs to be conducting a personal services business (PSB).

To be a PSB one of the PSB tests must be met. If the company is not conducting a PSB, then deductions are restricted and wages to associates are only deductible if they are performing 'principal work'. Administrative duties would not be considered as principal work.

If the company is conducting a PSB, then normal tax rules apply.

Based on the information provided it is only the services provided via D, E and F that are relevant to the generation of PSI. These services performed by A for medical consultations and radiology services on behalf of the company are A's PSI as they are mainly a reward for A's personal efforts and skills.

We do not consider the other contracts as A is engaged as an employee.

Personal Services Business Tests

The 80% rule

The 80% rule is only relevant to whether an individual or PSE can self-assess against the PSB tests.

The company does not receive 80% of the income from one entity.

Based on the information provided, less than 80% of the PSI is from one source and self-assessment is available. However, it is important that self-assessment against the PSB tests is correct.

Is the company conducting a personal services business?

All conditions of a test need to be satisfied for a test to be met. We have considered each of the following PSB tests against the information provided and concluded that the company meets the results test:

•         Business premises test

•         Unrelated clients test

•         Employment test

•         Results test

Results test

To meet the results test in an income year at least 75% of an individual's PSI in an income year must satisfy all three conditions below:

•         the income is for producing a result and

•         the individual or PSE is required to supply the plant and equipment and tools of trade needed to perform the work which produces the result and

•         the individual or PSE is liable for the cost of rectifying defects.

To meet the test all three conditions must be satisfied in relation to 75% of the PSI received.

The Practitioner (the doctor on behalf of C)/the Contractor (C) are required to have the relevant indemnity insurance. To satisfy this condition, there is no requirement for the individual or PSE to actually perform the work which rectifies the defect so long as they pay for it. The main consideration is whether they are exposed to commercial risk. A requirement to have indemnity insurance is an indicator that the individual or PSE is liable for rectification where the indemnity insurance is part of the contractual arrangement between the parties.

The Commissioner would say the Results test was passed.

'Producing a result'

Consultations by A with patients through the medical centres where payment is only received after the consultations (i.e. Medicare rebates) are considered to be for 'producing a result'. This is because payment is contingent on a contractually specified result being fulfilled (the patient consultation).

For services provided to F, the services provided in radiology consultation are not for 'producing a result'. This is because the contract (at Clause 7 and the Schedule) show that the taxpayer company is paid $X per hour for work done on an hourly basis over an invoicing period of a fortnight (refer clause 7) and not for a contractually specified result being fulfilled. Additionally, Subclause 18(f) provides for payment of fees for services provided up to the time of termination. This indicates that ongoing work performed up to that date will be paid for so there is no contractually specified result that is required to be achieved before payment is made.

'Provision of tools and equipment required to do the work that produces the result'

The contract with F is not one for 'producing a result', therefore this condition cannot be satisfied in relation to provision of those services as the legislation requires the tools and equipment be provided that 'produce the result'.

In relation to the consultations with patients through the medical centres where the services provided are for producing a result, even though the medical centres provide all the equipment required (except for some minor items), the company is paying the service fee for the equipment required and provided. Therefore, the Commissioner would accept that the taxpayer company is providing the tools and equipment required to produce the result.

'Liability for the cost of rectifying defects in the work'

As the services performed on behalf of the company by A require specific medical qualifications and it is usual custom and practice that part of those qualifications include the requirement for professional indemnity insurance, it is accepted that the taxpayer company would be liable for the cost of rectifying defects e.g. for medical negligence. The F contract specifically requires professional indemnity insurance to be held under 9(c)(iii) of the contract. The Commissioner would accept that this condition is met in relation to the provision of medical services.

'75% requirement'

The results test requires at least 75% of the PSI meets all three conditions listed above.

Based on the information provided, X% of the PSI received in the X income year through D and E appear to be from services that would meet all three results test conditions.

Conclusion

Section 26-35 of the ITAA 1997 provides that when making a payment to a related entity, such as a spouse, you can only deduct so much of the amount as the Commissioner considers reasonable (paragraph 13 of Taxation Ruling IT 2330 Income Tax: Income Splitting).

Based on the information provided, you satisfy the results test of the personal services income (PSI) rules, and are considered to be running a personal service business, therefore the PSI rules do not apply and normal tax rules apply in relation to deductions.

Therefore, you are able to deduct a reasonable amount for the wages paid to your associate for the administrative duties they perform, as long as the employment is bona fide.

For future financial years, self-assessment can be made to determine if the company is a PSB as the criteria needs to be met yearly.

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