Edited version of private advice

Authorisation Number: 1052030202447

Date of advice: 9 September 2022

Ruling

Subject: Personal services income

Question 1

Is the income received by the individual considered personal services income?

Answer

Yes. Based on the information you have provided to the Commissioner, the income you receive for personalised content and tips is personal services income.

Question 2

Is the individual conducting a personal services business in the 20XX income year?

Answer

Yes. Based on the information provided to the Commissioner, you are conducting a personal services business in the 20XX income year as you satisfy the three conditions of the results test.

This ruling applies for the following periods:

30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

You earn income through providing services to an online platform.

You supply all tools and equipment to complete your work.

You are personally required to rectify any issues in your work. This is done by refunding or exchange of different content.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 84-5

Income Tax Assessment Act 1997 section 86-15

Income Tax Assessment Act 1997 section 87-15

Income Tax Assessment Act 1997 section 87-18

Reasons for decision

Question 1

Is the income received by the individual on the online platform personal services income?

Summary

The income received from personalised content and tips is mainly a reward for the individual's personal efforts and skills and is therefore personal services income (PSI). The income received from subscriptions is not considered PSI.

Detailed reasoning

Personal services income (PSI)

PSI is income that is mainly a reward for an individual's personal efforts or skills (or would mainly be such a reward if it was the income of the individual).

By definition, income earned by an employee is PSI. However, the PSI rules do not apply to income received as an employee unless they are an employee of an interposed entity.

Income that is mainly generated from:

•         the sale or supply of goods;

•         the supply and use of income-producing assets; or

•         a business structure

is not PSI.

Only individuals can have PSI. PSI can be earned directly by an individual or indirectly through a company, partnership or trust (personal services 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.

The phrase 'or would mainly be such a reward if it was the income of the individual' applies to situations where the income is legally derived by a PSE and not the individual. If the PSE fails to meet a personal services business test in respect of a test individual, the PSI is deemed to be the income of the individual who earns the PSI and is attributed to that individual.

The use of the word 'mainly' means that the income referred to needs to be 'chiefly', 'principally' or 'primarily' a reward for the provision of the personal efforts of, or for the exercise of the skills of, an individual. That is, more than half (50%) of the ordinary or statutory income received is required to be a reward for the personal efforts and skills of an individual rather than being generated by the use of assets, the sale of goods or by a business structure.

You provide services through sending content to customers on an online platform. You also receive income through subscription fees and tips.

The income received by you from the customers is mainly a reward for your personal efforts and skills and is therefore PSI and the PSI rules do not apply. The subscription fees are not a reward for your personal efforts and skills and is not PSI and the PSI rules apply.

Question 2

Is the individual conducting a personal services business in the 20XX income year?

Summary

You are conducting a personal services business for the 20XX income year. The results test was met in the relevant income year, as at least 75% of the income received from the individual met all three conditions of the results test for the personalised content and tips.

Personal services business (PSB)

A taxpayer conducts a personal services business (PSB), and the PSI rules will not apply, if one of the four personal services business tests is met in the income year.

If the PSI rules apply, the net PSI received by the PSE will be attributed to the individual who generated that income and available deductions are restricted.

Attribution does not apply to sole traders as they do not earn PSI through a PSE and the PSI is included in the individual's personal tax return.

There are four personal services business tests:

•         the results test[1]

•         the unrelated clients test[2]

•         the business premises test[3], and

•         the employment test[4]

Only one test is required to be met for the PSI rules not to apply.

For the purposes of this private ruling, we are only considering the results test.

The results test

To meet the results test in an income year at least 75% of an individual's PSI in an income year must satisfy all three conditions below:

•         the income is for producing a result and

•         the individual or PSE is required to supply the plant and equipment and tools of trade needed to perform the work which produces the result and

•         the individual or PSE is liable for the cost of rectifying defects.

To meet the test all three conditions must be satisfied in relation to 75% of the PSI received.

Producing a result

In results-based contracts, payment is usually made for a negotiated contract price, as opposed to an hourly or daily rate, and is paid only when the contractual conditions have been fulfilled. Where remuneration is payable on the contractual conditions being fulfilled, the remuneration is for producing a result. The remuneration is often a fixed sum on completion of a particular job as opposed to an amount paid by reference to hours worked.

The essence of the contract must be to achieve a result and not to do work. The fact that an individual or PSE is required to complete identifiable tasks is not the same as achieving a result if those tasks merely form part of the work being paid for on an ongoing basis.

Required to supply the plant and equipment, or tools of trade, needed to perform the work

To satisfy the second condition, the individual or PSE must supply any plant and equipment or tools of trade needed to do the actual work which produces the result and which a service acquirer would expect the individual or PSE to provide or which the individual or PSE is contractually required to provide.

There are situations where, having regard to the nature of the work, no plant or equipment or tools of trade are needed to perform the work. Where this is the case, this condition will be met.

Liable for the cost of rectifying any defect in the work performed

To satisfy the third condition, the individual or PSE must be liable for the cost of rectifying any defects in the work. There is no requirement that they actually perform the work which rectifies the defect so long as they pay for it.

The main consideration is whether they are exposed to commercial risk.

Where physical rectification is not possible, the purpose of the provision would be satisfied where a right to claim for damages exists in respect of faulty or negligent performance of contractual obligations and the individual or PSE is, or would be, liable for the relevant component of damages awarded for the faulty or defective work.

The existence of a term in an agreement that the individual or personal services entity is liable for the cost of rectifying any defect in the work performed would support the conclusion that liability to make good any faulty workmanship exists, particularly where the individual or PSE and the service acquirer are dealing with each other at arm's length. However, the term in the agreement should not be merely 'window dressing', and regard may be had to all the circumstances of the case in determining whether the relevant liability really exists. A requirement to have indemnity insurance is an indicator that an individual or PSE is liable for rectification where the indemnity insurance is part of the contractual arrangements between the parties.

Application to your situation

The three conditions of the results test are met in relation to 75% of the PSI of the individual. Payments received by you for the personalised content and tips is for producing a result. That is, payment is contingent on services being provided after consultation with each customer.

Producing a result

When a customer requests for content, you are required to provide the content to the customer and receive payment when the services are provided.

Required to supply the plant and equipment, or tools of trade, needed to perform the work that produces the result

You provide the tools and equipment required to do your work which produces the results.

Liable for the cost of rectifying any defect in the work performed

You are personally required to rectify any issues in your work and the content you provide to your customers. This is done by varying means including refunds to customers or exchange of different content.

'75% requirement'

The results test requires at least 75% of the PSI meets all three conditions listed above.

Based on the information provided, at least 75% of your PSI received in the relevant income year through the online platform were from services that met all three conditions of the results test.

The PSI rules will not apply and an individual or entity will be conducting a personal services business if one of the four personal services business tests is met in an income year. You met the three conditions under the results test, therefore you passed the results test under section 87-18 of ITAA 1997 for the 20XX income year. You are conducting a personal services business for the personalised content and tips derived in the relevant income year.

[1] Section 87-18 of the ITAA 1997

[2] Section 87-20 of the ITAA 1997

[3] Section 87-30 of the ITAA 1997

[4] Section 87-25 of the ITAA 1997