Edited version of private advice

Authorisation Number: 1051605309058

Date of advice: 6 November 2019

Ruling

Subject: Personal services income

Question 1

Will the income derived by the Trust from the right to the performance fee be personal services income pursuant to section 86-15 of the Income Tax Assessment Act 1997?

Answer

No

Question 2

If the answer to Question 1 is "Yes", will the Trust pass the "results test" pursuant to section 87-18 of the Income Tax Assessment Act 1997?

Answer

Not applicable.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a professional consultant.

You are engaged in the business of providing investment management services (the Business).

You currently operate the Business as a sole trader.

From a period, you were engaged as an independent contractor to provide investment and other services to Company X pursuant to an Agreement (the Agreement).

Under the Agreement:

a)    The Applicant was paid a number of different fees including an investment management fee and a performance fee (collectively, the Fees)

b)    The investment management and other fees have been paid to you and have been included in your assessable income in the year in which they were received.

c)    You have a right to receive the performance fee (the Right) each year until all the investment assets are disposed of. The parties acknowledged that the Right may extend beyond the date of the Agreement termination date. This right is an income producing asset of yours.

During the time in which you provided services to Company X, Company X received regular tax invoices issued by you.

You have also provided investment management and other services to a number of other clients.

At all times, you have not been required, by law, to hold any insurance in order to carry out the Business.

Your agreement with Company X has been terminated.

Proposed new structure

You intend to isolate your current and future assets (excluding personal assets) into the Trust, rather than in your own name, for asset protection purposes.

As part of the proposed new structure, you have entered into a verbal agreement with the Trust (the Assignment Deed).

Under the Assignment Deed:

i)      You will assign to the Trust the Right under the Agreement which is an income producing right in its own right.

ii)     In consideration for receiving the Right, the Trust will pay market value of the Right at the time the Assignment Deed takes effect.

The Trust

The Trust is an Australian resident discretionary trust established by deed (Trust Deed).

Company Y was appointed trustee for the Trust (the Trustee).

You are the sole director of the Trustee and a beneficiary of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 84-5

Income Tax Assessment Act 1997 section 86-15

Income Tax Assessment Act 1997 section 87-5

Income Tax Assessment Act 1997 section 87-18

Reasons for decision

Summary

The income that is derived by the trust from the performance fee will not be personal services income of yours.

Since the income is not considered to be personal services income, there is no need to consider the results test.

Detailed reasoning

Whether the income is personal services income

The personal services income (PSI) measures contained in Divisions 84 to 87 of the Income Tax Assessment Act 1997 (ITAA 1997) only apply if a taxpayer has income that is PSI.

The definition of PSI is contained in subsection 84-5(1) of the ITAA 1997.The definition refers to income (including ordinary income or statutory income of any entity) that is mainly a reward for an individual'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 2000/1 Income tax: insurance registers (TR 2000/1)

TR 2000/1 provides guidelines on the taxation consequences of acquiring and disposing of an insurance register for the purposes of the ITAA 1997. While your situation does not involve insurance registers, there are analogies that can be made from the view contained in this taxation ruling.

Paragraph 73 of TR 2000/1 states:

In accordance with the distinctions drawn in IT 2408, we would accept that the legal source of renewal commissions, CPI commissions and/or orphan policy commissions is the agency agreement and not the personal exertion of the insurance agent, when the rights to these commissions are severable under the terms of the agency agreement and the severed chose in action relates to the provision of past consideration and not the future personal exertions of the agent. An amount received for an outright and unrestricted sale of such a chose in action is of a capital nature, providing the sale does not occur in the ordinary course of business of an agent or as part of a profit-making venture or transaction.

Application to your circumstances

You originally had an agreement that paid you a performance fee. That agreement has now been terminated. However, the obligations regarding payment of the performance fee is severable from the original Agreement. They are severable because the performance fee is founded on past consideration or services performed under the Agreement and not on consideration in the form of personal services to be provided by you in the future. You no longer have any obligations to perform any additional services to Company X.

The right to this performance fee has been effectively assigned to the Trust. The Trust is deriving income that comes from the Trust's ownership of the Right pursuant to the Assignment Deed. The Right to the income relates to the provision of past consideration and not your current or future personal exertions.

Accordingly, the income derived by Trust from the performance fee will not be your personal services income.

Results Test

Since the income derived by the trust will not be considered to be your personal services income, there is no need to determine if you meet the results tests.