Edited version of private ruling

Authorisation Number: 1011708962951

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Ruling

Subject: Personal services income

Questions and answers

Is the income received by the Trust for consultancy work the personal services income of Person X?

Yes.

Is the Trust conducting a personal services business?

No.

But for unusual circumstances would the results test, employment test, business premises test, unrelated clients test and 80% rule be met or reasonably be expected to be met?

No.

Can the Trust claim deductions for rental accommodation?

No.

Can the Trust claim deductions for home office expenses?

Yes.

Can the Trust claim a deduction for superannuation contributions for Person X?

Yes.

This ruling applies for the following period:

Year ended 30 June 2xxx

The scheme commences on:

1 July 2xxx

Relevant facts and circumstances

Company Y is trustee for the Trust.

The personal services work is undertaken by Person X is as a Consultant.

The year ended 30 June 2xxx is the first year of operation for the Trust.

Company Y entered into an agreement for provision of services to Company Z, to commence from December 2xxx.

Income from the contract with Company Z is the Trust's only income in the income year at issue.

The services you are required to provide are detailed at Schedule 1 of the contract. This is a work plan outlining activities to be undertaken commencing in September 2xxx until July 2xxx.

The details regarding the contract rate and payments are found in the contract.

Schedule D of the contract details the rate of payment as $xxx per annum, with the possibility of bonus. At clause x it is agreed that you will submit a single tax invoice to Company Z each thirty days for work done in that period.

The invoices you have provided show you were paid for the month of work in the invoice period at a rate per month.

Clause x of the contract states that:the Contractor will provide such office accommodation facilities and materials it requires to provide the Services…

Subject to a sub-clause,all equipment necessary to perform the Services under this Agreement, will be provided by Company Z at its expense.

Clause x of the contract provides that the Contractor will, without charge, immediately make good any damage caused by the Contractor and correct any works or workmanship found by Company Z not to comply with this Agreement.

If the Contractor does not make good damage or correct rejected works or workmanship within seven days of notification to it by Company Z. Company Z may make good the damage, replace such material or correct such work or workmanship and recover the cost of rectification and an Administration Fee from the Contractor as a liquidated debt due and payable.

Clause x of the contract provides: that in the event of termination, the Contractor will only be entitled to payment for Services performed, up to the date of termination.

Schedule B provides that: notwithstanding the date of this document, it formalises arrangements agreed and implemented on a specific date 2xxx.

Clause x of the contract relates to insurances required and includes General Public and Products Liability (for damage to people or property), Workers Compensation, Motor vehicle and Equipment and Other insurances outlined in Schedule B.

You have provided several records regarding communications with Company Z, the position you hold with them and the potential changes to this position.

Your consulting area is a specialised market and business is gained by way of referrals and that you acquired your contract with Company Z through word of mouth.

You provided services to one client in the income year as a result of word of mouth offers.

You are in negotiations with Company W to expand business via another company and you have submitted correspondence from them which indicates their interest in pursuing a business alliance.

An invoice was issued to this company for technical advice.

This company expressed interest in pursuing a business relationship.

Office leases are currently being investigated and a determination to move forward with these once a position has been negotiated between the Trust, Company W and Company Z.

You have not provided any information regarding employees or apprentices or the possibility of securing employees in the future.

You stated that the unusual circumstances for the year ended 30 June 2xxx which prevented you from meeting the personal services business tests was that it was your first year of operation.

You incurred rental expenses relating to the portion of the accommodation that was used as a home office.

You incurred running expenses for the home office, including electricity and telephone expenses.

Superannuation contributions were made on behalf of Person X.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 84

Income Tax Assessment Act 1997 Division 85

Income Tax Assessment Act 1997 Division 86

Income Tax Assessment Act 1997 Division 87

Reasons for decision

Personal services income

The measure contained in Divisions 84 to 87 of the Income Tax Assessment Act 1997 (ITAA 1997) only applies if a taxpayer has income that is personal services income (of an individual). The definition refers to income (including ordinary income or statutory income of any entity) that is mainly a reward for an individual's personal efforts or skills. Subsection 84-5(3) of the ITAA 1997 extends the definition of personal services income to income that is for doing work or for producing a result. The result must be produced from the individual's personal efforts or skills.

You stated that the personal services work undertaken by Person X is as a Consultant for brokerage services.

Based on the information provided, the Commissioner is satisfied that your income from your contract with Company Z is mainly, that is more than half, a reward for your personal efforts or skills and is therefore your personal services income.

Results test

The results test as specified in subsection 87-18(3) of the ITAA 1997 provides:

A personal services entity meets the results test in an income year if in relation to at least 75% of the personal services income of one or more individuals that is included in the personal services entity's ordinary income or statutory income during the income year:

· 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 considering the results test, regard must be had to the custom or practice as specified in subsection 87-8(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:

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

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

· for the entity to be liable for the cost of rectifying any defect in the work performed; as the case requires.

The 'results test' is based on the traditional criteria for distinguishing independent contractors from employees. Guidance on this distinction is provided in Taxation Ruling 2005/16.

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

Producing a result

To satisfy the first condition for the results test the personal services income must be for producing a result. The meaning of the phrase 'producing a result' means the performance of a service by one party for another where the first-mentioned party is free to employ his/her own means (that is, third party labour, plant and equipment etcetera) to achieve the contractually specified outcome. The essence of the contract has to be to achieve a 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.

The Explanatory Memorandum to the Alienation of Personal Services Income Bill 2000 provides:

The individual must actually be paid on the basis of achieving a result, rather than for example, for hours worked. (see paragraph 1.114)

If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is for producing a given result.

Where there is a contract, regard should be had to its true essence and the circumstances surrounding the formation of the contract may be of assistance to determine the true character of the contract. Having regard to the true essence of the contract, the manner in which payment is structured will not of itself exclude genuine result based contracts. For example, there are results based contracts where the contract price is based on an estimate of the time and labour cost that is necessary to complete the task, or may even be calculated on that basis, subject to reasonable completion times.

You provided an unexecuted copy of your contract with Company Z which is your only client in the income year at issue.

The details regarding the contract rate and payments are found at clause x and schedule D of the contract between the Trust and Company Z.

The services you are required to provide are detailed at Schedule C of the contract. This is a work plan outlining activities to be undertaken commencing in the particular month 2xxx until the particular month 2xxx.

Schedule D of the contract details the rate of payment as $xxx per annum, with the possibility of bonus. At clause x it is agreed that you will submit a single tax invoice to Company Z each thirty days for work done in that period.

In addition clause x of the contract provides that in the event of termination, the Contractor will only be entitled to payment for Services performed, up to the date of termination.

These terms indicate that the essence of the contract with Company Z is for doing work in a monthly invoicing period. The agreement shows that you are paid pro-rata on an amount per year. Payment is not contingent on a contractually specified result being achieved; rather it is paid incrementally for services already performed.

In accordance with the contract, the invoices show you were paid for the month of work in the invoice period at a rate per month. This is indicative of a contract to do work rather than a results based contract where payment is only received on completion of a contractually specified task.

The information provided shows that you were not paid for achieving a result.

Accordingly you do not satisfy paragraph 87-18(3)(a) of the ITAA 1997.

Required to supply the plant and equipment, or tools of trade, needed to perform the work

The second condition for the results test is that the individual or the personal services entity is required to supply the plant and equipment or tools of trade, needed to perform the work that produces the result.

Having regard to the custom and practice in relation to particular work there may be an expectation that a genuine independent contractor would be required to supply the plant and equipment or tools of trade necessary to perform the work. Where such an expectation exists, or where the contractual arrangements require the supply of necessary equipment or tools, such equipment or tools have to be supplied in order to meet the 'results test'.

The plant and equipment or tools of trade that may be required to be provided are those that are necessary to do the actual work that the individual or the personal services entity is contractually required to perform. This is to be distinguished from those circumstances where a service acquirer provides plant and equipment that are not needed by the individual or the personal services entity to perform the work.

There are situations where, having regard to the custom and practice of the work, or the practical circumstances and nature of the work, no plant or equipment or tools of trade are necessary to perform the work from which the individual or personal services entity produces the result. If no equipment or tools are needed the provision will always be met in these circumstances.

Clause x of the contract provides that:the Contractor will provide such office accommodation facilities and materials it requires to provide the Services…

However, another Clause xstates that subject to a sub-clause all equipment necessary to perform the services under this Agreement, will be provided by Company Z at its expense.

Whether the requirement to supply the plant and equipment or tools of trade is required is irrelevant as this condition cannot be satisfied if the work performed is not for producing a result.

The information provided shows that you were required to supply the plant and equipment or tools of trade needed to perform the work.

However, since the work performed is not for producing a result, this condition cannot be satisfied.

Accordingly paragraph 87-18(3)(b) of the ITAA 1997 is not satisfied.

Liable for the cost of rectifying any defect in the work performed

The third condition for the results test requires that the individual or the personal services entity is or would be liable for the cost of rectifying any defect in the work performed.

The emphasis here is on 'liability for the cost' of rectifying faulty work. That is, the key underlying consideration is whether the individual or entity is exposed to commercial risk in terms of a liability to cover the cost of rectifying defective work. This is consistent with the focus on 'the chance of profit and the risk of loss' as a traditional indicator that a taxpayer is an independent contractor conducting their own business.

It is only the cost of rectification of their defective work that must be met by the individual or entity. There is no requirement that the individual or entity actually perform the work which rectifies the defect so long as they pay for it. Nor does it matter whether the relevant exposure to a liability for the cost of defective work arises before or after payment by the service acquirer or delivery of the result.

The existence of a term in an agreement that the individual or personal services entity is liable for the cost of rectifying any defect in the work performed would support the conclusion that liability to make good any faulty workmanship exists, particularly where the individual or personal services entity and the service acquirer are dealing with each other at arm's length. However, the term in the agreement should not be merely 'window dressing', and regard may be had to all the circumstances of the case in determining whether the relevant liability really exists.

Clause x of the contract provides that the Contractor will, without charge, immediately make good any damage caused by the Contractor and correct any works or workmanship found by Company Z not to comply with this Agreement.

Further Clause x of the contract provides that if the Contractor does not make good damage or correct rejected works or workmanship within seven days of notification to it by Company Z. Company Z may make good the damage, replace such material or correct such work or workmanship and recover the cost of rectification and an Administration Fee from the Contractor as a liquidated debt due and payable.

These clauses indicate the Contractor may be liable for the cost of rectifying defects. The clauses indicate Company Z "may" recover the costs of making the defect good, and so it is up to Company Z's discretion whether you are liable.

These clauses do not prevent you from fixing defects during a normal work day.

If too many errors are made you may face the ultimate sanction of termination of your contract. However, this does not make you financially liable to make good faulty workmanship.

Additionally, Clause x of the contract relates to insurances required and includes General Public and Products Liability (for damage to people or property), Workers Compensation, Motor vehicle and Equipment and Other insurances outlined in Schedule B. Schedule B does not require you to hold any other insurance and there is no contractual requirement for you to hold professional indemnity insurance, which is an indicator of liability for the cost to rectify defects in the work.

The information provided shows that you are not liable for the cost of rectifying any defects in the work performed.

The Commissioner is therefore not satisfied that you meet the requirements of paragraph 87-18(3)(c) of the ITAA 1997.

Further information on the results test can be found in Taxation Ruling TR 2001/8 Income tax: what is a personal services business and on our website at www.ato.gov.au.

Employment test

The employment test as set down in section 87-25(2) of the ITAA 1997 provides:

A personal services entity meets the employment test in an income year if:

(a) the entity engages one or more other entities to perform work, other than:

(i) individuals whose personal services income is included in the entity's ordinary income or statutory income; or

(ii) associates of the entity that are not individuals; and

(b) that other entity performs, or those entities together perform, at least 20% (by market value) of the entity's principal work for that year.

……………

Engages

For the employment test the term 'engages' is not limited to employment type relationships but may also include contractual arrangements for the services of another entity. In this regard 'engages' does not bring a requirement for payment to the entity that performs the principal work. The critical element in satisfying the employment test is the market value of the principal work performed by an entity or entities engaged by the individual or personal services entity, not whether remuneration is made for the performance of the work.

Principal work

The term 'principal work' refers to the work that an individual or a personal services entity is required to perform to meet the key contractual obligations to the service acquirer and for which the individual or personal services entity is paid. It is the work that directly gains or produces personal services income, and as such would often be specifically required under a contract.

Activities such as clerical or administrative work that do not have the relevant connection with the generation of the personal services income do not form part of the principal work from which personal services income is derived.

20% by market value of the principal work

The market value of the principal work will depend on the nature and components of the principal work. The payment by a service acquirer will, in an arm's length dealing, reflect the total value of all the principal work to be performed under the contract. However, different components of this principal work performed by the entity (or entities) engaged may have different market values.

In an arm's length dealing, the market value of all the principal work is the total of the payments made by a service acquirer to the individual or personal services entity (that is, the contract price).

The market value of the work performed by the entity or entities engaged by an individual or personal services entity is what the individual or personal services entity would charge the service acquirer on an arm's length basis for the principal work performed by the entity (or entities) engaged (that is, the 'charge-out' rate).

No evidence has been provided to suggest that you engaged others to assist you in earning your personal services income. Consequently, the Commissioner is not satisfied that you met the employment test.

Further information on the employment test can be found in Taxation Ruling 2001/8 Income tax: what is a personal services business and on our website at www.ato.gov.au.

Business premises test

The business premises test as set down in section 87-30 of the ITAA 1997 provides:

(1) An individual or a personal services entity meets the business premises test in an income year if, at all times during the income year, the individual or entity maintains and uses business premises:

(a) at which the individual or entity mainly conducts activities from which personal services income is gained or produced; and

(b) of which the individual or entity has exclusive use; and

(c) that are physically separate from any premises that the individual or entity, or any associate of the individual or entity, uses for private purposes; and

(d) that are physically separate from the premises of the entity to which the individual or entity provides services and from the premises of any associate of the entity to which the individual or entity provides services.

(2) The individual or entity need not maintain and use the same business premises throughout the income year.

All of the conditions must be met for the business premises test to be satisfied.

Maintain and use

The Explanatory Memorandum to the Alienation of Personal Services Income Bill 2000 states at paragraph 1.97:

this means that the individual or entity must do more than merely have leased premises in its name to pass the test. The premises should actually be used to produce the personal services income.

The context in which the word 'maintained' is used merely requires that the individual or personal services entity keeps in existence or continuance, preserves or retains the business premises. There is no requirement that the individual or personal services entity bear running costs associated with the premises such as cleaning or utility costs.

Business premises

The inclusion of paragraph 87-30(1)(a) of the ITAA 1997 suggests that the adjective 'business' adds more to the word 'premises' than just the notion of a place where business is carried on. To give it meaning in the context of section 87-30 of the ITAA 1997, it is arguable that it describes premises which have the usual physical attributes and fixtures associated with commercial or business usage.

The Commissioner takes the view that the critical distinction between business premises and other premises is that, viewed from a business and commercial perspective, business premises must be apt for carrying on a business.

From the information provided it is evident negotiations regarding leases are being pursued, however, these seem to be contingent upon sorting out internal legalities. For the income year at issue, you did not maintain and use business premises.

The Commissioner is not satisfied that you met the business premises test on the basis that you do not satisfy the requirements of subsection 87-30(1) of the ITAA 1997.

Further information on the business premises test can be found in Taxation Ruling 2001/8 Income tax: what is a personal services business and on our website at www.ato.gov.au.

Unrelated clients test

The unrelated clients test as set out in section 87-20 of the ITAA 1997 provides:

(1) An individual or a personal services entity meets the unrelated clients test in an income year if:

(a) during the year, the individual or personal services 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 individual or of the personal services entity; and

(b) the services are provided as a direct result of the individual or 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.

(2) The individual or personal services entity is not treated, for the purposes of paragraph (1)(b), as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity.

Gains or produces income from providing services to 2 or more entities

The individual or personal services entity must, during the income year, gain or produce income from 'providing services' to two or more unrelated clients. As the application of the test is only relevant in those cases where income is an individual's personal services income, the reference to 'gains or produces income' can only be a reference to gaining or producing an individual's personal services income.

In cases where the personal services income is the ordinary or statutory income of the individual, it is the 'entities' with whom the individual has contracted to provide services, and which gives rise to the ordinary or statutory income that is the individual's personal services income, that is contemplated in terms of the phrase, 'providing services to 2 or more entities'.

What is meant by 'making offers or invitations'?

Making an offer or invitation to the public in general or to a section of the public is an indication by the individual or personal services entity of their willingness to perform services for anyone within a group or class of persons or to any member of the public. The intention of the individual or personal services entity in such activity is to attract or solicit members of the public to enter into agreements for their services. Relevant activities, such as advertising, point to the commerciality and independence of the enterprise conducted by the individual or the personal services entity. Advertising and similar activities are factors that point to the existence of a genuine business.

An invitation is the mechanism by which an individual or personal services entity holds out to or informs the public or a section of the public the services that the individual or personal services entity is able to provide. An invitation may be made in written or spoken form.

Advertising is an example of making an offer or invitation to the public given in the legislation. Other types of activities or actions that are considered to be 'making offers or invitations' in this context include:

· public tender;

· maintaining an Internet web site on which the availability of services are advertised; and

· word of mouth offers.

What is meant by 'to the public or a section of the public'?

An offer or invitation is made to 'the public at large' where any interested member of the public is capable of accepting it. An offer or invitation to 'a section of the public' is made in situations where only a select group is chosen to whom the invitation is made. Making an offer or invitation to a 'section of the public' could include offering to provide services to one entity for example in relation to competitive tenders.

For the purpose of the unrelated clients test, where there is a prior or subsisting relationship between the parties to an offer or invitation, the following factors are relevant when determining whether the offer or invitation is made to a section of the public:

The number of persons or entities to which the offer or invitation is made.

While not determinative, it is likely to be a public offer or invitation if more entities are involved;

The nature and content of the offer or invitation.

Where the offer or invitation is made as part of a competitive commercial process, such as a public tender, a prior relationship may not detract from the offer being made to the public;

The nature of the particular relationship between the parties to the offer or invitation.

Where the parties to the relationship deal with each other on an arm's length basis, the commercial character of the transaction is maintained. Accordingly, the fact that an individual or personal services entity may have worked for/provided services to an entity sometime in the past does not necessarily operate to exclude the individuals or personal services entity from satisfying this test.

For the year ended 30 June 2xxx, the personal services income you derived has been from one source; Company Z. Subsection 87-20(1) (a) of the ITAA 1997 states that the PSI must be gained by providing services to at least 2 unrelated entities. This requirement has not been met.

In addition, subsection 87-20(1)(b) of the ITAA 1997 provides that contracts obtained must be as a direct result of making offers or invitations to the public at large or a section of the public. You have also stated environmental legislation is a specialised market and business is gained by way of referrals and that you acquired your contract with Company Z through word of mouth.

For cases, such as yours, where the industry consists of a small number of participants, then those participants can constitute a section of the public.

You provided services to one unrelated client in the income year as a result of word of mouth offers. To meet the test, you must provide services to two or more unrelated clients, which you have not done. Therefore the Commissioner considers that the unrelated clients test in section 87-20 of the ITAA 1997 is not satisfied.

Further information on the unrelated clients test can be found in Taxation Ruling TR 2001/8 Income tax: what is a personal services business and on our website at www.ato.gov.au.

Unusual circumstances

You stated that if none of the tests are met, this is because of unusual circumstances.

The term 'unusual circumstances' refers to circumstances that are completely out of the ordinary and which suspend your capacity to meet the unrelated clients test during the relevant period. Further, the circumstances must only be temporary with the usual circumstances resuming in the short term.

Situations may arise where circumstances that might be considered to be unusual in an income year become the normal or usual. An example may be where an individual, who normally enters into monthly contracts with clients, enters into a 12 month contract with one client. At the conclusion of that contract, the contract is rolled over for a further period of 12 months with the possibility of further rollovers. It is considered that, whilst the first 12 month contract may give rise to unusual circumstances in the relevant income year, the subsequent rollover of that contract may result in the circumstances ceasing to be unusual.

The more temporary the circumstances and the greater likelihood that normal conditions will resume, the easier it will be to satisfy the unusual circumstances requirement.

Subsection 87-65(3) of the ITAA 1997 provides the Commissioner must not make a determination unless satisfied that in the income year during which the determination first has effect, or is taken to have first had effect, the conditions in one or more of subsections 87-65(3A), 87-65 (3B), 87-65 (5) and 87-65 (6) are met.

Subsection 87-65(3B) covers the second alternative. That is, unusual circumstances prevented the results test, employment test or business premises test from being met.

Paragraph 87-65(4)(a) of the ITAA 1997 provides:

For the purposes of paragraph (3B)(a) but without limiting the scope of that paragraph, unusual circumstances include providing services to an insufficient number of entities to meet the unrelated clients test under section 87-20 if:

(a) the personal services entity starts a business during the income year, and can reasonably be expected to meet that test in subsequent income years; or

(b) the personal services entity provides services to only one entity during the income year, but met the test in one or more preceding income years and can reasonably be expected to meet the test in subsequent income years.

Reasonable expectation

Whether an event could reasonably be expected to occur must be considered objectively and requires more than a possibility, risk or chance of the event occurring.

You stated that the unusual circumstances for the year ended 30 June 2xxx which prevented you from meeting the personal services business tests was that it was your first year of operation. According to the unexecuted contract provided, the commencement date of your contract is specific date 2xxx (Schedule B).

Schedule B states:

Notwithstanding the date of this document, it formalises arrangements agreed and implemented on specific date 2xxx.

However, the Work Plan associated with that contract outlines work to be completed in the relevant period (Schedule C). Evidence presented shows that the personal services work began in the 2xxx income year rather than the 2xxx income year despite the contract being formalised in the 2xxx income year.

The Commissioner is satisfied that the personal services work began in the 2xxx income year and therefore the unusual circumstances you cite do not apply for the 2xxx income year.

The Commissioner is therefore not satisfied that unusual circumstances existed in the 2xxx income year.

Results test

Regarding the results test, the onus is for you to provide evidence as to how you could be reasonably expected to meet this test in future years. Evidence such as possible future contracts and consultations/negotiations regarding payment for results based activities, that is, if you provide any tools or equipment to do the work and that you would be financially liable for work defects.

You stated you are in negotiations with another potential client, Company W. They have indicated an interest in pursuing a business alliance with you in the future. None of the information supplied however, indicates how the results test will be met in future.

Having considered the matter on the basis of the information provided, you are advised that the Commissioner is not satisfied that unusual circumstances existed. The Commissioner is not satisfied that but for the unusual circumstances in the year of income, you could reasonably have been expected to meet or would have met the results test.

Business Premises Test

Regarding the business premises test, the onus is on you to provide evidence as to how you could be reasonably expected to meet this test in future years. In order to met this requirement evidence such as business premises leases already in place would need to be submitted.

You have stated;

… in conjunction with Company W, office leases in a certain location are currently being investigated and a determination to move forward with these once a position has been negotiated between the Trust, Company W and Company Z…

It is considered that while business accommodations are being explored there must be a reasonable expectation that business premises will be secured. A more progressive relationship on this factor would need to have occurred, such as a signed lease or a location secured, separate to your personal address. You have not provided any further information to suggest negotiations such as these have taken place.

Having considered the matter on the basis of the information provided, you are advised that the Commissioner is not satisfied that unusual circumstances existed. The Commissioner is not satisfied that but for the unusual circumstances in the year of income, you could reasonably have been expected to meet or would have met the business premises test.

Employment test

Regarding the employment test, you are required to provide evidence as to how you could be reasonably expected to meet this test in the future.

In your case you have not provided any information regarding employees or apprentices or the possibility of securing employees in the future.

Having considered the matter on the basis of the information provided, you are advised that the Commissioner is not satisfied that unusual circumstances existed. The Commissioner is not satisfied that but for the unusual circumstances in the year of income, you could reasonably have been expected to meet or would have met the employment test.

Unrelated clients test

In addition to it being your first year of operation you state the following in regards to meeting the unrelated clients test in future years:

You are in negotiations with Company W to expand business via another company and you have submitted correspondence from them which indicates their interest in pursuing a business alliance.

An invoice issued to Company W for technical advice. You state this is evidence of continually seeking out new business.

You have also provided several records regarding communications with Company Z, the position you hold with them and the potential changes to this position. While these business matters signify ongoing business development, they are not relevant to this application. This is because the new structure has not occurred nor has been entered into. From the information provided negotiations are preliminary if at all.

Company W have expressed interest in pursuing a business relationship. It is unclear if Company W and Company Z are related entities; however, there is no further evidence to suggest this relationship has progressed further. The substantive material provided advises Company W wishes to formally enter into discussions. It is considered this is a point to soon to suggest that an arrangement may be met in a future year.

You have stated that your contract with Company Z was gained via word of mouth. However, you have not provided any information to advise the steps taken to acquire this contract or other potential contracts, which may indicate a reasonable expectation you would meet the unrelated clients test in subsequent years.

Having considered the matter on the basis of the information provided, you are advised that the Commissioner is not satisfied that unusual circumstances existed. The Commissioner is not satisfied that but for the unusual circumstances in the year of income, you could reasonably have been expected to meet or would have met the unrelated clients test.

Consequently, as none of the PSB tests are met and there is no reasonable expectation they will be met in the 2xxx income year, the PSI rules apply to you.

Deductions

A personal services entity (PSE) is a company, partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals. In this case the Trust is the personal services entity.

The income received by the Trust for consultancy services provided by Person X (you) is PSI as this income is mainly a reward for your personal efforts or skills.

Subdivision 86-B of the ITAA 1997 contains a general rule and specific rules about the expenses that can be claimed by an entity not conducting a PSB. The general rule in section 86-60 of the ITAA 1997 provides that for an outgoing to be deductible to the PSE, the outgoing must first be an allowable deduction under another provision of the ITAA, such as section 8-1.  

In addition, a deduction is only available to the entity for an amount to the extent that it relates to gaining or producing an individual's PSI if the individual would have been entitled to deduct that amount if the same loss or outgoing had been incurred by the individual in the same circumstances as the PSE.

As the PSI rules apply to you, your business can claim the following deductions against the PSI you received, if your business incurred the expenses to generate this income:

· Gaining work - for example advertising, tendering and quoting for work

· Registration and licensing fees

· Insuring against loss of income, earning capacity or liability for acts or omissions in the course of earning income

· Meeting obligations under GST

· Salary or wages paid to the individuals who performed the services - the principal worker

· Salary or wages for an arm's length employee (not an associate)

· Reasonable amounts paid to an associate for principal work

· Complying with workers' compensation law

· Super contributions for the individual or arms' length employee (not an associate)

· Running expenses for a home office - for example, heating and lighting (but not rent, mortgage interest, rates or land taxes)

· Depreciation of income producing-assets

· Entity maintenance deductions which include

· Fees or charges associated with a bank, credit union or other financial institution account (but not including interest or interest-like amounts)

· Tax-related expenses (e.g. preparing or lodging tax returns and activity statements)

· Any expenses incurred for preparing or lodging a document under Corporations Law, except where the payment is made to an associate, and

· Statutory fees.

In particular, your business can only claim a deduction for an expense paid or incurred in gaining or producing assessable income. The expense cannot be a capital, domestic or private expense.

You cannot claim:

· Rent, mortgage interest, rates and land tax

· Payments to associates for support work (non-principal work)

· Super contributions for associates who do support work (non-principal work)

· Car expenses for more than one motor vehicle

Rental expenses

Section 85-15 of the ITAA 1997 provides:

You cannot deduct under this Act an amount of rent, mortgage interest, rates or land tax:

· for some or all of your residence; or

· for some or all of your associate's residence;

To the extent that the amount relates to gaining or producing your personal services income.

Section 85-15 denies a deduction for an amount of rent, mortgage interest, rates or land tax for some or all of an individual's (or an associate's) residence.

Section 85-15 does not apply to an amount of rent, mortgage interest, rates or land tax to the extent that it is pain in respect of the individual's business premises where such premises do not form part of the individual's residence.

You have stated that you work from your private residence in a home office arrangement. Clause xxx of your contract with Company Z stipulates that you will provide 'such office accommodation facilities and materials it requires to provide the services'.

For the year ended 30 June 2xxx, it has been determined that you are not conducting a personal services business. Therefore under section 85-15 of the ITAA 1997 you cannot claim rent for the portion of your rented accommodation which is your home office.

Running expenses

Running expenses are the increased costs of using facilities within your home because of your business activities. You can claim the additional expenses you incur because you carry on a home-based business, such as, additional electricity, heating or cooling costs (utilities), additional cleaning costs or additional phone expenses.

Expenses for lighting and heating of a residence are not affected by section 85-15 of the ITAA 1997. Such expenses, when incurred for the use of a home study in connection with the gaining and producing of assessable income, including personal services income, will generally be deductible.

Using your floor area may be an appropriate way of working out some running expenses. For example, if the floor area of your home office is 10 percent of the total area of your home, you can claim 10 percent of heating costs.

How you work out these additional costs is up to you, but you should be able to provide enough information to show:

· your claim is reasonable

· you have excluded the private (domestic) proportion of expenses associated with normal living costs

You have requested if the Trust can claim running expenses of the home office as a deduction for the year ended 30 June 2xxx. In particular, you wish to claim a portion of electricity and phone usage. Based on the information provided the Trust is entitled to claim running expenses for its home office.

Superannuation deductions

Section 86-75 of the ITAA 1997 allows a deduction for contributions paid to a superannuation fund for an individual whose personal services income is included in the entity's income. You have advised that the superannuation contributions were paid to a complying superfund on behalf of yourself, Person X. Therefore this is considered an allowable deduction.

Please note however, there are other requirements found in section 290 of the ITAA 1997 which advise the specifics of the transaction required to fulfil the legislative requirements for deductions for superannuation contributions.