Edited version of your written advice

Authorisation Number: 1012933479088

Date of advice: 6 January 2016

Ruling

Subject: Income - Personal Services Income and Part IVA

Questions and answers

1. Do the personal services income measures apply to make some or all of the income derived by the Company from Entity X not assessable to the Company?

Yes.

2. Does part IVA apply to the arrangement between the Company, Individual Y and Entity X?

Not applicable.

This ruling applies for the following period

1 July 2014 to 30 June 2015

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Company is a consultancy company that earns its income from the expertise or efforts of Individual Y.

The Company does not pass the Personal Services Results Test.

The Company provides a service to Entity X which operates under the Trust which is associated with Individual Y.

Individual Y is the director of the trustee company of the Trust and is also the trustee of the sole unitholder of the Trust.

The company also provides services to Entity Z which Individual Y is a director.

All transactions between the Company, Entity X and Entity Z will be at arms-length.

Individual Y provides services to an unrelated client, Entity Q.

The Company's income for the financial year ended 30 June 2015 is as follows;

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 318

Income Tax Assessment Act 1936 subsection 318(1)

Income Tax Assessment Act 1936 subsection 318(2)

Income Tax Assessment Act 1936 subsection 318(3)

Income Tax Assessment Act 1936 subsection 318(6)

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1997 subsection 84-51(1)

Income Tax Assessment Act 1997 Section 86-30

Income Tax Assessment Act 1997 Section 87-15

Income Tax Assessment Act 1997 Section 87-20

Reasons for decision

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

Section 86-30 of the ITAA 1997 provides;

Ordinary income or statutory of the personal services entity is neither assessable income nor exempt income of the entity, to the extent that it is personal services income included in your assessable income under section 86-15 of the ITAA 1997.

Under subsection 84-5(1) of the ITAA 1997 Personal Service Income (PSI) is income which is mainly a reward for an individual's efforts or skills (or would mainly be such a reward if it had been derived by the individual).

At paragraph 41 of Taxation Ruling TR 2001/8 it states;

Where 80% or more of an individual's PSI is not from the same entity (or from the same entity and that entity's associates), then the individual or personal services entity can self-assess as to whether they meet one of the 3 personal services business tests.

Subsection 87-15 if the ITAA 1997 sets out the three personal services business tests, they are;

• The unrelated client test

• The employment test

• The business premises 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.

'Associates' takes its definition from section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Under subsection 318(1) of the ITAA 1936 it states;

For the purposes of this Part, the following are associates of an entity (in this subsection called the primary entity) that is a natural person (otherwise than in the capacity of trustee):

(a) a relative of the primary entity;

(b) a partner of the primary entity or a partnership in which the primary entity is a partner;

(c) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;

(d) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;

(e) a company where:

(i) the company is sufficiently influenced by:

(A) the primary entity; or

(B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or

(C) another company that is an associate of the primary entity because of another application of this paragraph; or

(D) 2 or more entities covered by the preceding sub-subparagraphs; or

(ii) a majority voting interest in the company is held by:

(A) the primary entity; or

(B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the preceding paragraphs of this subsection; or

(C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and because of the preceding paragraphs of this subsection.

Subsection 318(2) of the ITAA 1936 provides;

For the purposes of this Part, the following are associates of a company (in this subsection called the primary entity):

(a) a partner of the primary entity or a partnership in which the primary entity is a partner;

(b) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;

(c) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;

(d) another entity (in this paragraph called the controlling entity) where:

(i) the primary entity is sufficiently influenced by:

(A) the controlling entity; or

(B) the controlling entity and another entity or entities; or

(ii) a majority voting interest in the primary entity is held by:

(A) the controlling entity; or

(B) the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3);

(e) another company (in this paragraph called the controlled company) where:

(i) the controlled company is sufficiently influenced by:

(A) the primary entity; or

(B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or

(C) a company that is an associate of the primary entity because of another application of this paragraph; or

(D) 2 or more entities covered by the preceding sub-subparagraphs; or

(ii) a majority voting interest in the controlled company is held by:

(A) the primary entity; or

(B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; or

(C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection;

(f) any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3).

Under subsection 318(3) of the ITAA 1936 it states;

For the purposes of this Part, the following are associates of a trustee (in this subsection called the primary entity):

(a) any entity that benefits under the trust;

(b) if a natural person benefits under the trust - any entity that, if the natural person were the primary entity, would be an associate of that natural person because of subsection (1) or because of this subsection;

(c) if a company is an associate of the primary entity because of paragraph (a) or (b) of this subsection - any entity that, if the company were the primary entity, would be an associate of the company because of subsection (2) or because of this subsection.

Under subsection 318(6) of the ITAA 1936 the following interpretation is provided;

For the purposes of this section:

(a) a reference to an entity benefiting under a trust is a reference to the entity benefiting, or being capable (whether by the exercise of a power of appointment or otherwise) of benefiting, under the trust, either directly or through any interposed companies, partnerships or trusts; and

(b) a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); and

(c) an entity or entities hold a majority voting interest in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company.

Application to your circumstances

You have stated that the Company does not pass the results test.

The purpose of the 80% rule is to determine whether the individual or the personal service entity can self-assess against one of the three personal business tests; based on the information provided the 80% rule has been met because 80% or more of individual or personal services entity's income is not from the same entity.

However, the information provided shows that the unrelated client test has not been met because there is only 1 unrelated client; there must be two or more unrelated clients.

Further, you have not requested we consider any of the other tests; therefore based on the facts, the personal services entity is not conduction a personal services business and Division 86 applies.

Consequently, the personal services income is not assessable to the Company and as per section 86-30 of the ITAA 1997 is assessable to the individual.

Part IVA

Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances if you obtain a tax benefit in connection with a scheme, and it can be concluded that the scheme, or any part of it, was entered into for the dominant purpose of enabling a tax benefit to be obtained.

The personal services income measures apply and operate to attribute income to the personal services provider therefore Part IVA of the ITAA 1936 does not need to be considered.