Edited version of private advice

Authorisation Number: 1052018407197

Date of advice: 15 August 2022

Ruling

Subject: Personal services income - employee incentive scheme

Question

Is the income received from your employer, as a share of income from a pooled source under employee incentive scheme, considered to be Personal Services Income (PSI) under section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. Based on the information you have provided the Commissioner considers the income received from your employer under the employee incentive scheme is not personal services income.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an employee to a company, which is part of a business group. You receive an annual base salary.

The company has XX employees and numerous contractors.

In addition to the base salary, you receive an equal share of "pooled income' at an agreed rate of gross profit calculated using specific method under an employee incentive scheme.

The purpose of the scheme is to improve business performance, increase employee motivation and encourage staff retention.

The Incentive program only applies to certain staff employed within the department. There are a number of key employees (including you) that are entitled to the incentive scheme.

The main activity undertaken by key personnel is the trading of XXX on the global market. The pooled income is the residual profits from the operation of the trading activity, generated by a group of employees including you, who work collaboratively to produce the extraordinary income for the business.

Income is contributed to the pool only after producing a specific result and any associated costs, such as equipment or software purchases, are paid from the funds in the pool.

Each employee who is entitled to the employee incentive scheme is then paid an equal percentage of the 'net' pool balance at the end of each period irrespective of their individual contribution to the income accumulated in the pool.

There is no direct correlation between hours worked and compensation received. The income received by you is a "share of profit".

The business built its goodwill in the industry over time.

Your total expected pooled income for the relevant Financial Year is around $XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 84-5

Reasons for decision

Personal services income (PSI)

Section 84-5 of the ITAA 1997 defines PSI as income that is mainly a reward for the personal efforts or skills of an individual. Taxation Ruling TR 2001/7 Income Tax: The meaning of personal services income (TR 2001/7) goes on to say that PSI income does not include income that is 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. PSI can be earned directly by an individual or indirectly through a company, partnership or trust.

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.

The services provided by you, either directly through you as a sole trader or via an interposed entity are services that require your personal skills and expertise. The income so derived will be PSI.

Taxation Ruling TR 2021/D2 Income tax: personal services income and personal services businesses (TR 2021/D2) provides at paragraphs 34 to 39 that Income which is generated from the business structure of an entity is not PSI. Where income is derived by a firm or practice which has substantial income-producing assets, or 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.

Paragraph 69 of TR 2001/7 explains that PSI rule does not apply to businesses that have a substantial profit-yielding structure. The distinction between income that is mainly a reward for personal efforts or skills and income from a business structure will need to be made having regard to factors such as the number of arm's length employees or others engaged to perform work, the presence of goodwill, the extent to which income-producing assets are used to derive the income, the nature of the activities carried out, the size of the operation and the extent to which the income is dependent upon a particular individual's own personal skills, efforts or expertise.

Application to your situation

You are an employee of a company, which is part of a business group. The company has XX employees and numerous contractors.

The income of the company is derived from the goodwill of the group (built up in the industry over years) and the organisation of the group's human resources, funds, and tangible assets to produce the required services, and it is that which is rewarded rather than the personal efforts or skills of taxpayer.

The company's ordinary income or statutory income is produced mainly by the group's business structure, and the income of the group is not mainly a reward for your personal efforts or skills. When you provide your services, you are working on behalf of the group rather than for yourself.

The employee incentive scheme only applies to certain key staff employed within the relevant department. The main activity undertaken by key personnel is the trading of XXX on the global market. The pooled income is in effect the residual profits from the operation of the business activity, generated by a group of employees including you, who work collaboratively to produce the extraordinary income for the business. It is not dependent upon any one particular individual personal skills or efforts. The pooled income is a result of the group performance of many employees, using the business' fund and stock and relied on the business' existing goodwill, it is to be connected to the success of the overall production and other external factors outside of your control.

The income you received was calculated as a fixed percentage of the pool balance and is not determined by the amount of work completed by you alone. There is no direct correlation between hours worked and compensation received. The income received by you is a share of net profit, not mainly a reward for your personal efforts or skills.

Based on the information provided, the Commissioner considers the income you received from your employer, as a share of income from a pooled source under the employee incentive scheme is not personal services income under subsection 84-5(1) of the ITAA 1997.