Edited version of your written advice

Authorisation Number: 1051195068513

Date of advice: 28 February 2017

Ruling

Subject: Personal Services Income

Question 1

Is the income generated by the Company classified as personal services income?

Answer

Yes

Question 2

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 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Company conducts an assessment business.

The Company has one client.

The Company has two main assessors.

The Company is owned by a trust and the two main assessors are beneficiaries of the trust.

The Company pays salary and wages to the main assessors; alternatively, the company may pay dividends to the trust and the trust makes distributions to them.

The Company employs one ongoing part-time staff member doing some admin work and part of the assessing work.

The Company needs to provide all the equipment to complete the work.

The Company has created some templates which are used for assessing assignments; the Company needs to find and purchase relevant textbooks and materials to create and update templates at its own cost.

The contract between the Company and the Client specifies that the Company will not be paid on an hourly basis and will only be paid to achieve the agreed results.

The contract between the Company and the Client specifies that the Company is liable for the cost of rectifying defects.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 84-5

Income Tax Assessment Act 1997 subsection 84-5(3)

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

Question 1

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.

Subsection 84-5(3) of the ITAA 1997 extends the definition of personal services income to income that is for doing work or for producing a result. The result must be produced from the individual's personal efforts or skills.

Taxation Ruling TR 2001/7 Income tax: the meaning of personal services income provides that implicit in the word mainly is that more than half of the relevant amount of the statutory or ordinary income, of the entity, under the contract is income that is a reward for the personal efforts or skills of an individual.

The use of 'mainly' in the definition means that the income referred to needs to be 'chiefly', 'principally' or 'primarily' a reward for the provision of the personal efforts of, or for the exercise of the skills of, an individual. Therefore, the use of tools of trade or plant and equipment does not of itself preclude the income from being personal services income.

Furthermore, where the income of an entity is generated by more than one individual under separate or distinct contracts/obligations, the income of the entity would include the personal services income of more than one individual.

In this case, the Company provides assignments assessing services through two main assessors and it is evident that the income derived will be a reward for the personal efforts or skills of two main assessors. Therefore, the income generated by the Company is classified as personal services income.

Question 2

Subsection 86-15(2) of the ITAA 1997 states that 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.

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.

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 (PSBD) 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.

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 (for example, 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 this case, it is evident that in relation to at least 75% of the personal services income you derive:

(a) the Company is not paid on an hourly basis and will only be paid to achieve the agreed results; and

(b) the Company is required to provide the equipment necessary to do the work; and

(c) the Company is liable for the cost of rectifying any defects in the work performed.

Therefore, the company passes the results test and is conducting a personal services business. It will not be subject to the personal services income alienation rules.