ATO ID 2002/805: Alienation of Personal Services Income - Employment Test
Date of decision: 21 February 2002
Year of income: Year ending 30 June 2002
Business line: Small Business/Individual Taxpayers

Issue
Does the taxpayer satisfy the employment test in section 87-25 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision
No. The taxpayer does not satisfy the Employment Test contained in section 87-25 of the ITAA 1997.

Facts
The taxpayer is a company with two shareholders. Both shareholders and an unrelated third party are employees of the taxpayer. The taxpayer pays each employee an annual salary in monthly instalments. The taxpayer has contracted to supply the three employees to a licensed dealer in securities ('the Dealer'). In turn the individuals have been appointed as proper authority holders ('PAH') under subsection 94(2) of the then Corporations Act 1989 . Under the contract the taxpayer receives commissions determined by reference to corporate advisory transactions as well as equity and derivatives business written by the individuals for the Dealer. The three individuals perform the usual functions of a PAH for the Dealer. Contractually, the relevant functions are performed in each individual's personal capacity and not as an employee of the taxpayer. The individuals are not entitled to any remuneration from the Dealer. The three individuals are the only entities that the taxpayer engages to perform work. The taxpayer is not itself involved in advising clients or dealing in securities.

Reasons for decision
Summary: The employment test is set out in section 87-25 of the ITAA 1997. Subsection 87-25(2) deals with personal services entities and provides as follows: (2) A personal services entity meets the employment test in an income year if: (a) the entity engages one or more other entities to perform work, other than: (i) individuals whose personal services income is included in the entity's *ordinary income or *statutory income; or (ii) *associates of the entity that are not individuals; and The Commissioner's views on categorising each item of ordinary income as the personal services income of an individual (or otherwise) are set out in Taxation Ruling TR 2001/7 (see paragraphs 44 and 45). The commission entitlements of the taxpayer represent discrete items of ordinary income and each item of ordinary income is mainly a reward for the efforts or skills of a particular individual. Therefore, each item of commission income to which the taxpayer becomes entitled must be tagged as the personal services income of one of the individuals. To whom a particular item of commission income is to be tagged depends upon whose efforts or skills were involved in generating the income for the Dealer and the consequential commission entitlement of the taxpayer. Each of the individuals have discrete amounts of personal services income included in the ordinary income of the taxpayer. Subparagraph 87-25(2)(a)(i) of the ITAA 1997 prevents an individual who earns personal services income from being included for the purposes of the employment test.. As the taxpayer does not engage any other entity to perform work the taxpayer is unable to satisfy the employment test in section 87-25 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 subsection 84-5(1) section 87-25
Related public rulings and determinations: Taxation Ruling TR 2001/7 | Taxation Ruling TR 2001/8
Related ATO interpretative decisions: ATO ID 2002/2 | ATO ID 2002/3 | ATO ID 2002/4
Subject references: Alienation of personal services income Personal services income PSBD unusual circumstances employment test PSBD unusual circumstances unrelated clients test