ATO ID 2002/802: Alienation of Personal Services Income - Personal Services Entity
Date of decision: 21 February 2002
Year of income: Year ending 30 June 2002
Business line: Small Business/Individual Taxpayers

Issue
Is the taxpayer a personal services entity within the meaning of subsection 86-15(2) of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision
Yes. The taxpayer is a personal services entity within the meaning of subsection 86-15(2) 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 by the dealer 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 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: A personal services entity is defined in subsection 86-15(2) of the ITAA 1997 as follows: (2) A personal services entity is a company, partnership or trust whose *ordinary income or *statutory income includes the personal services income of one or more individuals. Personal services income is defined under section 84-5 of the ITAA 1997 as follows: (1) 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). Under the contract the taxpayer has been engaged to supply the Dealer with the individuals and it is the taxpayer and not the individuals who is entitled to payments of commission. The amounts received by the taxpayer, pursuant to the contract, constitute the ordinary income of the taxpayer within the meaning of section 6-5 of the ITAA 1997. As the amounts received by the taxpayer are calculated by reference to corporate advisory transactions as well as equity and derivative business written by the individuals, the amounts received are mainly a reward for the personal efforts or skills of the individuals within the meaning of subsection 84-5(1) of the ITAA 1997. Accordingly the ordinary income of the taxpayer includes the personal services income of the individuals and the taxpayer is a personal services entity as defined in subsection 86-15(2) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 6-5 subsection 84-5(1) subsection 86-15(2)
Related public rulings and determinations: Taxation Ruling TR 2001/7 | Taxation Ruling TR 2001/8
Related ATO interpretative decisions: ATO ID 2002/803 | ATO ID 2002/804 | ATO ID 2002/805
Subject references: Alienation of personal services income Assessable income of a personal services entity Personal services income PSE assessable income