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Ruling

Subject: Personal services income

Question and answer

Does the Trust meet the 80% rule and the unrelated clients test on the basis of being an agent as specified in section 87-40 of the Income Tax Assessment Act 1997?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2012

Relevant facts and circumstances

An Agent is contracted through a Trust (the Trust) as a licensed agent to the Principal of a business.

The Agent derives personal services income (PSI) from commissions received from acting as an agent for the Principal.

The Agent does not contract to any other business, but is able to.

During normal business hours, the Principal provides a desk and computer equipment necessary for the Agent to carry out work on behalf of the Principal, five days a week. The individual also uses a home office for approximately two hours per day, five days a week, to attend to emails and contact clientele not available during normal business hours.

The income derived by the Agent is received from clients owned by the Principal and the commission is 100% results based. The income is received directly by the Principal with X% being paid to the Franchisor. The Agent submits an invoice for Y% of the remaining commission.

The full commission is higher, however, there is a verbal agreement between the Agent and the Principal that Z% of the commission is deducted for the provision of the desk by the Principal.

The Agent was originally employed by the Principal and actively promoted the Principal's business through direct advertising and via a sign written car. The Agent also engaged in networking activities in the local area.

Since taking the contracted position, the Agent is still actively promoting the Principal's business through networking and direct advertising. The agent no longer has sign writing on her/his motor vehicle, but continues to have personalised registration plates promoting the Principal's business.

All the clientele obtained by the Agent belong to the Principal and she/he has no rights to them. The Agent has serviced the Principal's clientele for some years through repeat business and referrals. The Agent does not seek clientele for her/his own business purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 86-15(2)

Income Tax Assessment Act 1997 Section 87-15

Income Tax Assessment Act 1997 Section 87-20

Income Tax Assessment Act 1997 Section 87-40

Income Tax Assessment Act 1997 Subsection 87-40(2)

Income Tax Assessment Act 1997 Subsection 87-40(4)

Income Tax Assessment Act 1997 Subsection 87-40(5)

Reasons for decision

A personal services entity (PSE) is a company, partnership or trust whose ordinary or statutory income includes the PSI of one or more individuals (subsection 86-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997)).

The PSI rules will apply to the PSI of the PSE unless it meets one of the four personal services business tests in the relevant income year. The four tests are the results test, unrelated clients test, employment test and business premises test (section 87-15 of the ITAA 1997).

Provided that 80% or more of an entity's PSI does not come from one client, a PSE will meet the unrelated clients test under section 87-20 of the ITAA 1997 during an income year if:

• the PSE gains or produces income from providing services to two or more entities that are not associates of each other, and are not associates of the PSE; and

• the services are provided as a direct result of the PSE making offers or invitations (for example, by advertising), to the public at large or to a section of the public, to provide the services.

Section 87-40 of the ITAA 1997 modifies the operation of the 80% rule and unrelated clients test for agents who bear entrepreneurial risk in the way they provide services. To qualify, the following conditions listed in subsection 87-40(2) must be satisfied:

(a) the individual or personal services entity of another entity is an agent of the other entity (the principal) but not the principal's employee; and

(b) the agent receives income from the principal that is for services that the agent provides to other entities (customers) on the principal's behalf; and

(c) at least 75% of that income is commissions, or fees, based on the agent's performance in providing services to the customer on the principal's behalf; and

(d) the agent actively seeks other entities to whom the agent could provide services on the principal's behalf; and

(e) the agent does not provide any services to the customers, on the principal's behalf, using premises:

(i) that the principal or an associate of the principal owns; and

(ii) in which the principal or an associate of the principal has a leasehold interest;

unless the agent uses the premises under an arrangement entered into at arm's length.

In regard to condition (e) above, an arm's length agreement is considered to be an agreement entered into on terms, and for a consideration, that could be expected if the agent entered the agreement with a completely independent third party on a commercial basis.

This condition does not require that the agent has commercial premises. The agent could satisfy this condition by working from home, or from their car for instance. This condition does also not preclude agents from entering the premises of the principal for the purposes of negotiating, organising or administering arrangements solely between the agent and the principal, such as negotiating the agency agreement, rates of commission, collecting commissions, receiving training or attending sales strategy meetings.

If the conditions in subsection 87-40(2) of the ITAA 1997 are satisfied, the modified rules for agents will apply to provide that:

• for the purposes of the 80% rule, the income is treated as if it were PSI from the customer, and not PSI from the principal (subsection 87-40(4) of the ITAA 1997), and

• for the purposes of the unrelated clients test, any services are treated as if the agent, and not the principal, provided them to the customer (subsection 87-40(5) of the ITAA 1997).

In this case, the Trust satisfies the criteria in 87-40(2) of the ITAA 1997 given that:

(a) the Trust is an agent of the Principal and not an employee;

(b) the Trust receives income from the Principal that is for services provided to clients of the Principal;

(c) over 75% of the Trust's income is commissions based on services provided to clients of the Principal;

(d) the Trust actively seeks customers on behalf of the Principal; and

(e) although the Trust provides services to clients of the Principal at premises owned or leased by the Principal, you have stated that there is a commercial arrangement in place and we will accept that the use of the premises is obtained as part of a commercial arrangement entered into at arm's length.

Consequently, as the Trust meets the criteria in subsection 87-40(2) of the ITAA 1997, the modified rules for agents will apply to provide that:

• for the purposes of the 80% rule, the income is treated as if it were PSI from the customer, and not PSI from the Principal, and

• for the purposes of the unrelated clients test, any services are treated as if the Trust, and not the Principal, provided them to the customer.

Therefore, the Trust meets the 80% rule and the unrelated clients test on the basis of satisfying the agents test and the PSI rules will not apply.