Edited version of private advice

Authorisation Number: 1051991200162

Date of advice: 8 June 2022

Ruling

Subject: Personal services income - income averaging

Question

Do the income averaging rules under division 405 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to you in relation to the assessable professional income earned?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a sportsperson.

You have generated income from: prize money from competing in competitions, guest appearances, speaking engagements, appearances and interviews on TV and radio and sponsorship endorsements

During a prior financial year you settled the Trust.

Since settlement all income earning activities have been conducted through the Trust

The Trust distributes all income to you with no salary or wages paid by the trust to you

You have self-assessed and do not meet the results test under section 87-18 of ITAA 1997

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 subsection 86-15 (3)

Income Tax Assessment Act 1997 section 86-30

Income Tax Assessment Act 1997 Division 87

Income Tax Assessment Act 1997 section 87-1

Income Tax Assessment Act 1997 section 87-18

Income Tax Assessment Act 1997 Division 405

Reasons for decision

The ordinary income or statutory income of any other entity that is mainly a reward for the taxpayer's personal efforts or skills, is the taxpayers PSI under subsection 84-5 (1) of ITAA 1997. In your case, to the extent that the income you have earned through the Trust is mainly a reward for your personal effort or skills, it will be classified as your PSI.

The Trust meets the definition of a personal services entity under subsection 86-15 (2). The PSI of a personal services entity is to be included in the individual's assessable income unless the personal services entity is conducting a personal services business under subsection 85-15 (3).

Division 87 of ITAA 1997 outlines that a personal services business exists if there is a personal services business determination or if one or more of 4 tests for what is a personal services business are met. No personal services determination has been made; the four tests and their application to your circumstances are outlined below.

The results test

Under subsection 87-18 (3) the results test is satisfied if, in relation to 75% of the PSI, the income is for producing a result; and the personal services entity is required to supply the plant and equipment, or tools of trade, needed to perform the work from which the personal services entity produces the result; and the personal services entity is, or would be, liable for the cost of rectifying any defect in the work performed.

In your circumstances, the personal services entity receives income from sponsorship deals and speaking engagements. Both services do not constitute payment for producing a result, instead these contracts operate as remuneration for your time on an ongoing basis in return for you providing certain services. Fundamentally these contracts represent payment for your time as opposed to payment for a result. In the relevant financial years, the combination of these payments exceeds 25% of the total PSI, and therefore the results test will fail. Additionally, it is noted all equipment that is required for speaking engagements is not provided by the entity, but instead by the payor. This includes lighting, audio-visual equipment, microphone, lectern and laptop/computer prompts.

Unrelated clients test

An entity will meet the unrelated clients test under section 87-20 of ITAA 1997 if during the year, the entity gains or produces income from providing services to 2 or more entities that are not associates of each other and are not associates of the personal services entity; and the services are provided as a direct result of the personal services entity making offers or invitations (for example, by advertising), to the public at large or to a section of the public, to provide the services.

In your circumstances, the Trust provides services to more than 2 entities that are not associates of each other. However, you obtain the contracts for these services by media and word-of-mouth. You do have a website, however no offer to the public is made through the site. Accordingly, as the services do not occur as a direct result of any offers or invitations to the public at large, or a section of the public, this test has not been met.

Employment test

The employment test under subsection 87-25 (2) of ITAA 1997 is not met as the sole individual who performs principal work is the individual who earns PSI.

Business premises test

As no business premises are maintained and used by the individual or the entity, this test is not established under section 87-30 of ITAA 1997.

As the personal services entity did not pass any of the business tests, the PSI alienation rules will apply under Division 86 of ITAA 1997. To the extent that the income received is PSI, the income will be attributed to you in your individual income tax return under subsection 86-15(1) of ITAA 1997.

Income averaging

Division 405 of the Income Tax Assessment Act 1997 (ITAA 1997) allows special tax rates to apply to certain above-average special professional income.

Division 405 of the ITAA 1997 only applies to assessable professional income derived by an individual Australian resident who is a special professional. As such, where the provisions refer to 'you', they do not apply to companies, trusts or partnerships.

Subsection 405-25(1) of the ITAA 1997 states that you are a special professional if you are a sportsperson. Therefore, as a sportsperson you are a special professional for Division 405 of the ITAA 1997 purposes.

The definition of assessable professional income under section 405-20 includes amounts:

•         Amounts received as prizes

•         Assessable income from promotions and commentary.

In your case, you received income from: prize money from competing in sprint canoe competitions, guest appearances, speaking engagements, appearances and interviews on TV and radio, sponsorship endorsements and work for a sports organisation. These income streams are considered as assessable professional income.

To the extent that the income received is PSI attributed to your individual income tax return and satisfied the definition of assessable professional income, the income averaging provisions within Division 405 of ITAA 1997 will apply.

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