Edited version of your written advice

Authorisation Number: 1051453132518

Date of advice: 9 November 2018

Ruling

Subject: Personal services income (PSI)

Question 1

Is the income personal services income?

Answer

Yes

Question 2

Is Company A considered to be conducting a personal services business?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a qualified professional, providing services in the area of Category A.

You currently provide services through Company A, a company you control as director.

The sole shareholder of Company A is Company A Nominees Pty Ltd which is the trustee for a family trust, of which you are a beneficiary.

As an assisting professional, you are currently engaged to assisting with certain procedures, and assisting the principal professional with customers.

You use tools to perform your work which are the property of the another entity where you provide services.

Should there be any issues with your work, you are required to rectify the issue.

You hold professional indemnity insurance.

You now wish to provide a new service and offer interpretation of scans for Company B who will provide all necessary equipment and software to allow this work to be performed. You anticipate that you will use both your own computer as well as a computer supplied to perform this work. The necessary software to interpret these scans will be provided and paid for by Company B.

The contract for this proposed new service includes the following terms –

● You are responsible for ensuring that examination descriptions entered into the software system accurately reflect the services provided.

● You are engaged to provide consultancy services for a number of committed sessions as rostered by Company B.

● The company will provide any necessary equipment and software.

● You are required to have your own professional indemnity insurance.

● You will be paid a service fee of X% of fees charges.

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

Personal Services Income

Personal services income (PSI) is income that is mainly a reward for the personal efforts or skills of an individual rather than being generated by the use of assets, the sale of goods, the granting of a right to use property or a business structure.

Only individuals can have personal services income.

The services provided by you on behalf of Company A are services that require the skill and expertise of yourself.

Results Test

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 meets the results test in an income year if, in relation to at least 75% of the personal services income of one or more individuals that is included in the personal services entities ordinary or statutory income during the income year

● The income is for producing a results; and

● The personal services entity is required to supply the plant and equipment, or tools of trade, needed to perform the work from which the personal services entity produces the result; and

● The personal services entity is, or would be, liable for the cost of rectifying any defect in the work performed.

Application to your circumstances

The phrase “producing a result” means the performance of a service to achieve a contractually specified outcome. The essence of the contract has to be to achieve a result and not to do work. If remuneration is payable when and only when the contractual conditions have been fulfilled, the remuneration is for producing a result.

Under your contract you are paid “X% of billings”. Payment is made to you upon Company B receiving a tax invoice issued by Company A.

As payment is contingent on you completing examination descriptions into an information system your work is regarded as producing a result.

The Commissioner is therefore satisfied that the first element of the results test is met.

The second element of the results test requires any plant and equipment or tools of trade that are necessary to do the work contractually required to be performed (if any) must be provided by the individual or the personal services entity.

The contract between the Company A and Company B states that Company B will provide equipment and necessary software and will maintain such equipment and software at their expense.

Accordingly, the Commissioner is not satisfied that you meet the second element of the results test.

The third element of the results test requires the individual or personal services entity be liable for the cost of rectifying any defects in the work performed.

The contract states that you are required to have your own professional indemnity insurance and that you provide a certificate of such insurance on at least an annual basis. The existence of this term in the contract would support the conclusion that a liability to make good any faulty workmanship exists.

The Commissioner is therefore satisfied that you meet the third element of the results test.

All elements of the results test need to be met to be considered a personal services business. As the Commissioner is not satisfied that the second element of the results test is met, Company A is not considered to be conducting a personal services business.