Edited version of private advice

Authorisation Number: 1051907789745

Date of advice: 11 November 2021

Ruling

Subject: Personal services business - unrelated clients

Question

Does the entity pass the unrelated clients test for a personal services business as set out in section 87-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Based on the information provided, the Commissioner considers:

•         Person B provides professional consulting services through Company A. The income generated is mainly a reward for Person B personal efforts and skills and is therefore personal services income.

•         Less than 80% of Company A's income came from one source in the 20XX income year.

•         Company A provided the services of Person B to four unrelated clients; and

•         Company A acquired clients primarily through word of mouth and Person B were approached by the partner/director of the clients who knew his name and met at different industry conference or forum was considered as a continuous process that satisfied the requirement of s 87-20(1)(b). The services to those clients were provided as a result of this form of marketing.

•         Three of the four unrelated clients that Company A provided services to in the 20XX income year satisfied all the requirements of the unrelated clients test.

Consequently, the Commissioner consider Company A has satisfied all the conditions of the unrelated clients test in the 20XX income year.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A was incorporated on XX/XX/XXXX.

Person B is a director and shareholder of Company A.

During the 20XX income year, Person B providing consulting services through Company A.

The primary business activity of Company A is providing strategic advice a specialised or niche industry.

Company A employed Person B to perform the advisory services and the spouse Person C as a contracted assistant to the Principal.

The industry Company A worked in is considered as a specialised or niche industry where there are only a very small number of potential service acquirers.

Company A do not have a website or advertise to obtain contracts to provide Person B's services.

Conventional advertising such as advertising in newspapers, brochures or other medium was inappropriate in Person B's circumstances due to the commitment to confidentiality policy and the sensitivity of the service provided.

Company A makes offers to the public consisting of the following:

•         word of mouth referrals; and

•         regularly attended the industry workshops, seminars and meetings, and maintained contacts with key industrial players

In the 20XX income year, Company A provided services to four unrelated entities, among which three entities were in the specialised or niche industry.

The most income from one client was less than 80% of the total income for the year.

For the clients obtained in the 20XX year,

•         Person B was well known as an expert to all four clients

•         Person B was approached by the partner or directors of the clients after industry forums, seminars or workshops.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 87-20

Taxation Ruling TR 2001/7

Taxation Ruling TR 2001/8

Taxation Ruling TR 2021/D2