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Edited version of your written advice
Authorisation Number: 1051190966176
Date of advice: 17 February 2017
Ruling
Subject: Personal Services Income
Question 1
Will the company be subject to the personal services income alienation rules?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You are a professional working in your chosen area.
You provide your services through a company structure.
As a professional you are engaged to perform a certain task and get results.
All your tools are supplied by the people you work for.
Should there be any issues with the work you do, you are required to assist to rectify the issue.
You hold insurance.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 84-5
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.
In your case, you are a professional and it is evident that the income you derive is mainly a reward for your personal efforts or skills and is therefore personal services income.
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).
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 a personal services entity receives is attributed to the individual or individuals who perform the work.
In your case, you conduct your business through a company structure. Therefore, the company will be a personal services entity as its income will include your personal services income.
A personal services entity or individual conducts a personal services business if a personal services business determination is in force or if the entity or individual meets at least 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).
Should the results test be passed, the personal services income alienation rules will not apply and the other tests will not have to be considered.
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.
Paragraph 34 of Taxation Ruling TR 2001/8 Income tax: what is a personal services business states that a personal services entity or individual will meet the results test where:
a) the contract is to produce a specified outcome or result and payment is based on performance of the contract (i.e., for producing the outcome or result);
b) the entity or individual provides the equipment and tools, if any, necessary for doing the work; and
c) the entity or individual bears the commercial risks, including liability for defective work.
In your case, it is evident that in relation to at least 75% of the personal services income you derive:
a) the income will be for producing a result; and
b) the entity or individual will be required to provide the equipment or tools necessary to do the work; and
c) the company will be liable for the cost of rectifying any defects in the work performed.
Therefore, the company will pass the results test and will be conducting a personal services business. It will not be subject to the personal services income alienation rules.