Edited version of private advice

Authorisation Number: 1052422973120

Date of advice: 17 July 2025

Ruling

Subject: Personal services income

Question 1

Will the income derived by the Company under Agreement 2 in the income year ending 30 June 20YY and future years be personal services income (PSI) of P1 under section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If the answer to question 1 is yes, did the Company conduct a personal services business (PSB) as it met the results test in section 87-18 of the ITAA 1997 in the income year ending 30 June 20YY and for future years in relation to that PSI?

Answer

As the answer to question 1 is no, it is not necessary to rule on this question.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

1.  The Company operates an xxxx business, and undertakes various xxxx activities.

2.  The Company has developed a strong reputation in the xxxx industry.

3.  P1 is a director of the Company and undertakes xxxx activities for the Company

4.  The Company also employs a significant number of staff to undertake it's xxxx activities.

5.  The Company derives income from its various xxxx activities.

6.  The Company provides xxxx services to Company A under Agreement 1. The xxxx services under Agreement 1 are undertaken by P1 and an employee.

7.  The Company also entered into Agreement 2 with Company A. Agreement 2 requires Company A to pay a fee to the Company that is calculated in accordance with Agreement 2.

8.  The Company has a large number of third-party clients.

9.  The Company has office facilities.

Relevant legislative provisions

Income Tax Assessment Act 1997Section 84-5

Reasons for decision

Subsection 84-5(1) of the ITAA 1997 states that 'your ordinary income or statutory income, or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income)'.

Taxation Ruling TR 2022/3 Income tax: personal services income and personal services businesses (TR 2022/3) sets out the Commissioner's view on what is personal services income (PSI):

34. PSI is defined as income that is mainly a reward for an individual's personal efforts or skills (or would mainly be such a reward if it was the income of the individual).

35. Only individuals can have PSI. It can be earned directly by a sole trader or indirectly through an interposed entity (PSE)...

37. The use of the word 'mainly' means that the income referred to needs to be 'chiefly', 'principally' or 'primarily' a reward for the provision of the personal efforts or for the exercise of the skills of an individual. That is, more than half (50%) of the ordinary or statutory income received is required to be a reward for the personal efforts and skills of an individual rather than being generated by the use of assets, the sale of goods or by a business structure...

42. Income which is generated from the business structure of an entity is not PSI.

43. Where income is derived by an entity which has substantial income-producing assets or a number of 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.

44. Entities may have regard to the following factors to determine whether their income is mainly a reward for the personal efforts or skills of individuals or is derived from a business structure:

•                     the number of arm's length employees or others engaged by the entity to perform work and their relative contribution to the income earning activities

•                     the existence of goodwill

•                     the extent to which income-producing assets of the business 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...

45. The fact that services are performed through an entity that is not an individual does not automatically mean that income received by the entity in respect of those services is generated from a business structure. The factors listed in paragraphs 43 to 44 of this Ruling must be applied to each test individual's particular circumstances to assess whether the income is generated from a business structure or whether it is generated from the test individual's own personal skills, efforts or expertise.

Under Agreement 2, Company A is required to pay a fee to the Company that is calculated in accordance with Agreement 2.

The Company undertakes various xxxx activities. The Company has developed a strong reputation in the xxxx industry, and has a large number of clients. The Company derives income from its various xxxx activities.

The Company employs staff to help undertake it's xxxx activities (in addition to P1). The Company has business premises for use by its employees.

The above shows that the Company has extensive xxxx activities, has goodwill, has a significant number of employees, and provides facilities for the employees to perform their work. On balance, it is considered that the income of the Company, including amounts from Agreement 2, is generated from the business structure of the Company.

As such, the amount paid to the Company under Agreement 2 will not be personal services income of P1.

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).