ATO ID 2002/568: Alienation of Personal Services Income - Prior Year Losses
Date of decision: 6 February 2002
Year of income: Year ended 30 June 2001 Year ending 30 June 2002
Business line: Small Business/Individual Taxpayers

Issue
Can a company claim a deduction for prior year losses, which arose from operating a wholesaling business, against personal services income received by the company, where the personal services income is subject to the alienation measures contained in Part 2-42 of the Income Tax Assessment Act 1997 ('ITAA 1997').

Decision
No, losses from the sale of goods, including prior year losses, cannot be offset against personal services income that is subject to the alienation measure in Part 2-42 of the ITAA 1997.

Facts
The company accumulated losses from trading as a wholesaler between the years 1996 and 1999. The company temporarily ceased trading during the 1999-2000 tax year and does not expect to trade as a wholesaler in the future.. The company's income is now derived from the personal services of an individual. The company is not conducting a personal services business.

Reasons for decision
Summary: Personal services income is defined in section 84-5 of the ITAA 1997 as: 'Your *ordinary income or *statutory income, or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income).' The income from wholesaling was from the sale of goods and not mainly from the personal efforts or skills of an individual. As such, the company's wholesaling activities would not fall into the definition of personal services income in section 84-5 of the ITAA 1997. The company's current contracting activities fall within the definition of personal services income because the income is mainly a reward for the personal efforts of skills of an individual. Section 86-15 of the ITAA 1997 provides that personal services income that is not from conducting a personal services business or promptly paid as salary and wages is attributed to the individual who provided the services. Section 86-20 of the ITAA 1997 allows the amount attributed under section 86-20 to be reduced by the deductions to which the entity is entitled. The alienation of personal services income measure clarifies what deductions can be claimed against affected personal services income and limits some deductions. To reduce the attributed amount under section 86-15 of the ITAA 1997 the deduction must be one to which the personal services entity is entitled under section 86-60 of the ITAA 1997. Firstly, for an amount to be deductible it must relate to the gaining or producing of an individual's personal services income. The losses from wholesaling in prior years are not an amount that relates to the gaining or producing of the personal services income of the individual. Secondly, the outgoing must be an allowable deduction under another provision of the ITAA 1997, such as the general deduction provision in section 8-1 of the ITAA 1997. Thirdly, section 86-60 of the ITAA 1997 operates to determine if the circumstances that apply to the entity were to apply to the individual, whether a deduction would be allowable under Division 85 of the ITAA 1997. A deduction is only available to the personal services entity if the individual would have been entitled to deduct that same amount incurred, given the same circumstances as the personal services entity. Losses generated from non personal services income activities, such as wholesaling, cannot be deducted from personal services income. This is because Step 1 of the method statement in section 86-20 of the ITAA 1997 only refers to deductions that relate to the personal services income. Given that the company is not considered to be conducting a personal services business, it can only deduct those amounts stated in the method statement outlined in section 86-20 of the ITAA 1997 against the personal services income. However, the losses from wholesaling can be offset against any other income the company may have in accordance with Division 36 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Section 8-1 Section 84-5 Division 36 Section 86-15 Section 86-20 Section 86-60
Subject references: PSI non-employees deductions entitlements PSI alienation of personal services income