Edited version of your written advice

Authorisation Number: 1013131564129

Date of advice: 30 November 2016

Ruling

Subject: Personal services income of a partnership

Questions and answers

1. Is the partnership subject to the personal services income alienation rules?

No.

2. Is the partnership entitled to distribute the income of the partnership equally to each partner?

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

A and B registered a partnership that provides consulting services to numerous unrelated clients each year through the qualified technical partner, A.

B assists with non-technical administration and does the banking for the business.

The consulting services are carried out from the home of A and B.

Most business is obtained through word of mouth referrals.

For each new job, a quote is initially provided to the client for the work involved and payment is required within 14 days of completion of the job.

The partnership is liable for any defects in the services provided which could potentially be up to the cost of a particular project plus any related personal injury.

A and B have a verbal partnership agreement in which they agreed to share profits equally and take on the business risk equally.

A and B contributed equally to the contribution of capital and business assets and own all business assets equally. They are also equally liable for all business debts.

The partnership has a business bank account in its name and both A and B have full power to operate the account.

The partnership has a business vehicle loan in its name.

A and B have not kept any records of capital contribution or minutes of meetings etc as only the two are involved and they have a high level of trust in each other.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 84-5

Income Tax Assessment Act 1997 subsection 86-15(1)

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

Income Tax Assessment Act 1997 Section 87-15

Income Tax Assessment Act 1997 Subsection 87-18(3)

Reasons for decision

Personal services business

Section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997) defines the personal services income of an individual as being income which is mainly a reward for that person's personal efforts or skills.

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

In this case, A provides consulting services through a partnership and it is evident that the income derived is a reward for the personal efforts or skills of A. Therefore, the partnership is a personal services entity.

A personal services entity will be subject to the personal services income alienation rules unless it conducts a personal services business. Under the alienation rules, the personal services income of a personal services entity is attributed to the individual or individuals who perform the work (subsection 86-15(1) of the ITAA 1997).

Section 87-15 of the ITAA 1997 provides that a personal services entity conducts a personal services business if it meets at least one of the four personal services business tests or if there is a personal services business determination in force.

Subsection 87-18(3) of the ITAA 1997 provides that a personal services entity meets the results test in the relevant income year if, in relation to at least 75% of the personal services income of one or more individuals that is included in the entity's income for the year:

a) the income is for producing a result; and

b) the personal services entity is required to provide the equipment or tools necessary to do the work; and

c) the personal services entity is, or would be, liable for the cost of rectifying any defects in the work performed.

Income is for producing a result when the essence of the contract is to achieve a specific result and not to do work. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked.

In this case, it is evident that the income is for producing a result, the partnership is required to provide the equipment necessary to do the work and the partnership is liable for the cost of rectifying any defects in the work performed.

Therefore, the partnership meets the results test, is a personal services business and is not subject to the personal services income alienation rules.

Partnership

The existence of a partnership for income tax purposes is determined based on the facts of each case. The existence of a partnership is evidenced by the actual conduct of the parties towards one another and towards third parties during the course of carrying on business.

Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships) (TR 94/8) sets out factors that will be considered in determining the existence of a business partnership. No one factor is conclusive and each case will depend on its facts and surrounding circumstances.

The mutual assent and intention of the parties, together with conduct supporting that intention need to be considered. Mutual assent and intention to act as partners is considered essential in demonstrating the existence of a partnership, with a written or oral agreement accepted as prima facie evidence of such an intention.

Beyond intention, all relevant circumstances including the conduct of the parties will also be assessed.The factors considered include:

a) joint ownership of business assets;

b) registration of business name;

c) joint business account and the power to operate it;

d) extent to which parties are involved in the conduct of the business;

e) extent of capital contributions;

f) entitlements to a share of net profits;

g) business records; and

h) trading in joint names and public recognition of the partnership.

While it is not essential that all partners actively participate in a partnership, such participation supports the existence of a partnership. Exclusive performance of all the work or activities of a business by one party will not, of itself, negate the conclusion that a partnership exists. In husband and wife situations, the conduct of each party is examined to determine whether it is part of their ordinary domestic relationship or part of a business association (paragraphs 20 and 22 of
TR 94/8).

In this case:

● A and B equally own all business assets and are equally liable for the business debt;

● A and B have registered the partnership;

● the partnership has a business bank account in its name and A and B both have full power to operate it;

● B carries out some of the activities of the business which can be differentiated from their normal domestic activities;

● A and B contributed capital equally to the business;

● A and B have a verbal agreement to share the profits equally; and

● the partnership has some public recognition through its bank account and business vehicle loan.

Based on the information provided, it is considered that A and B have demonstrated the mutual assent and intention to act as partners in the business.

Therefore, the partnership is entitled to distribute the income of the partnership equally to each partner based on the oral partnership agreement.