ATO ID 2002/804: Alienation of Personal Services Income - Unrelated Clients 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 unrelated clients test contained in section 87-20 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision
No. The taxpayer does not satisfy the unrelated clients test contained in section 87-20 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. More than 80% of the taxpayer's income is from the Dealer. The three individuals perform the usual functions of a PAH for the Dealer. Contractually, the 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 taxpayer is not itself involved in advising clients or dealing in securities.

Reasons for decision
Summary: The unrelated clients test is set out in section 87-20 of the ITAA 1997. The section provides that a personal services entity meets the unrelated clients test if: When 80% or more of an individual's personal services income comes from one source and the taxpayer does not satisfy the results test, the taxpayer cannot self-assess whether the unrelated clients test is met. For the individual's income to be taken to have been earnt in the course of conducting a personal services business in these circumstances, subsection 87-15(3) of the ITAA 1997 ('the 80% test') requires that a personal services business determination be obtained by the taxpayer from the Commissioner. The amounts received by the taxpayer under the contract is the personal services income of the three individuals. As 80% or more of the personal services income of each individual comes from the Dealer, and the taxpayer does not satisfy the results test, a personal services business determination must be obtained from the Commissioner for each individual in order for each individual's personal services income to be taken to be earnt in the course of conducting a personal services business. Section 87-65 of the ITAA 1997 specifies the matters about which the Commissioner must be satisfied to issue a personal services business determination to a personal services entity. Subsection 3 provides as follows: (3) The Commissioner must not make the determination unless satisfied that, in the income year during which the determination first has effect, or is taken to first have had effect: (a) the entity: (i) could reasonably be expected to meet, or met, the results test under section 87-18, the employment test under section 87-25, the business premises test under section 87-30 or more than one of those tests; or (ii) but for unusual circumstances applying to the entity that year, could reasonably have been expected to meet, or would have met, at least one of the 4 personal services business tests; In view of this section, the Commissioner cannot issue a personal services business determination on the basis of the unrelated clients test unless unusual circumstances have prevented the taxpayer from passing the test during the income year. Taxation Ruling TR 2001/8 provides at paragraph 96: 96. The term 'unusual circumstances' used in sub paragraphs 87-60(3)(a)(ii) and 87-65(3)(a)(ii) refers to exceptional circumstances that are temporary, with the likelihood that the usual circumstances will resume in the short term. As there are no unusual circumstances which could be characterised as exceptional and temporary the Commissioner cannot issue a Personal Services Business Determination to the taxpayer on the basis of the unrelated clients test. There are special rules, contained in section 87-40 of the ITAA 1997, which allow agents to apply the unrelated clients test even though 80% or more of their income comes from one source. These special rules, subject to certain conditions being met, treat the clients of the principal as the source of the agent's personal services income for the purposes of the 80% test. The special rules also treat the clients of the principal as the clients of the agent for the purposes of the unrelated clients test. The first condition of the special rules is set out in paragraph 87-40(2)(a) of the ITAA 1997 which provides as follows: '(2) Subsection 87-15(3) and section 87-20 apply, in the manner specified in this section, to the individual or the *personal services entity if: (a) the individual or personal services entity is an agent of another entity (the principal) but not the principal's employee; ........' The word agent is not defined for the purposes of section 87-40 and therefore takes its common law or ordinary meaning. The taxpayer is not an agent of the Dealer and therefore the taxpayer is not eligible for the special rules in subsections 87-40(4) and 87-40(5) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 subsection 87-15(3) section 87-20 section 87-40 subsection 87-65(3)
Related public rulings and determinations: Taxation Ruling TR 2001/7 | Taxation Ruling TR 2001/8
Related ATO interpretative decisions: ATO ID 2002/802 | ATO ID 2002/803 | ATO ID 2002/805
Subject references: Alienation of personal services income Personal services income PSBD normal circumstances unrelated clients test PSBD unusual circumstances unrelated clients test