Edited version of private advice

Authorisation Number: 1051942550699

Date of advice: 1 April 2022

Ruling

Subject: Personal services income - service entity arrangement

Question

Is the consultation fee generated by the doctor for administration work in service entity personal services income under section 84-5 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Period ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Person One, a doctor, is a trustee/beneficiary of a Trust (the Trust) who earns consulting fees.

The Trust is one of the unit-holders of a Service Entity which runs a medical clinic and practice maintenance fees are paid to.

Working days and consulting fee generation between the unit-holders of the Service Entity vary.

Person One is also involved in the administration work for the Service Entity including practice maintenance, coordination of IT support, staff supervision, review of staff payroll, staff recruitment and purchases.

In order to provide an incentive to the working unit-holders, the unit-holders mutually agreed that Person One would receive X% of the consulting fee generated by them as an additional profit distribution to Person One's Trust as business income and Y% of the consulting fee generated by Person One for professional services. The remaining X% would be paid to the Service Entity towards a practice maintenance charge.

Relevant legislative provisions

Section 84-5 of the Income Tax Assessment Act 1997

Reasons for decision

Section 84-5 of the Income Tax Assessment Act 1997 states that yours or any other entity's ordinary or statutory income is your personal services income (PSI) if the income is mainly a reward for your personal efforts or skills.

Taxation Ruling 2001/7 Income Tax: the meaning of personal services income explains that the PSI measure only applies to income earned mainly from the provision of an individual's labour or skills (PSI) rather than being generated by the use of assets, the sale of good, the granting of a right to use property or by a business structure.

Only individuals can have PSI. It can be earned directly by a sole trader or indirectly through an interposed entity.

A personal services entity (PSE) is a partnership, company or trust that receives the PSI of one or more individuals and is interposed between the individual(s) providing the work or services and the service acquirer.

Paragraph 35 in Draft Taxation Ruling TR 2021/D2 explains that where income is derived by a firm or practice which has substantial income producing assets, a number of employees, or both, the income is more likely to be generated by the profit-yielding structure of the business rather than from the rendering of personal services.

In this case, Person One performs consulting services through the Trust in a medical clinic run by the Service Entity. The Trust receives Y% of the consulting fee generated by Person One for their professional services provided in the clinic. The Trust also receives an additional X% of the consulting fee for the administration work Person One performs in the clinic.

Person One's consulting fees are PSI as they are a reward for their personal efforts and skills. The income received is not generated by the use of assets, the sale of goods, or the granting of rights to use property or income generated from a business structure.