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Edited version of your written advice
Authorisation Number: 1013139688360
Date of advice: 15 December 2016
Ruling
Subject: Personal services income
Question
Is the Company subject to the personal services income alienation rules?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 201X
Year ending 30 June 201X
Year ending 30 June 201X
The scheme commences on:
1 July 201X
Relevant facts and circumstances
Individual X is an employee of the Company.
The Company has entered into a consultancy agreement (the agreement) with Entity X for the services of Individual X.
The services provided by Individual X involve the presentation to potential purchasers of analyses of trends, returns, prices, models and other information in connection with a particular industry.
In addition to using materials purchased from Entity X and relying upon base presentation materials prepared by Entity X, Individual X applies their professional skills and knowledge in providing the services.
If the potential client commits to a purchase from Entity X based on the presentation, Entity X pays Individual X a set fee plus percentage on completion of the service. No payment is made if the client does not proceed with a purchase.
Individual X spends 40% of their time working from their home office, 50% of their time meeting with clients or on the road and 10% of their time at the office of Entity X.
All tools and equipment (e.g. computer software and hardware, office furniture, motor vehicle, mobile phone and internet) are provided and paid for by the Company.
Individual X used the same IT people to set up their computer at Entity X to maximise compatibility and ease of use but the Company paid for this service.
The agreement specifies that the Company, and Individual X as its representative, must indemnify Entity X for any claim against, or loss, expense, damage or costs sustained by Entity X as a result of any act or omission by the Company or Individual X.
The Company is currently in the process of organising its own public liability/professional indemnity insurance.
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
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, the Company provides consulting services through Individual X and it is evident that the income derived is a reward for the personal efforts or skills of Individual X. Therefore, the Company 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, the Company meets the results test as:
a) the income derived by Individual X is for producing a result; and
b) the Company is required to provide the equipment necessary to do the work; and
c) the Company is, or would be, liable for the cost of rectifying any defects in the work performed.
Therefore, as the Company meets the results test, it is a personal services business and is not subject to the personal services income alienation rules.