Private ruling: Personal services income
Published: February 2015
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Questions and answers | 1. Is the income received by the Trust personal services income? | Yes. | 2. Is the Trust conducting a personal services business that meets the requirements of the unrelated clients test and the 80% rule? | Yes. | 3. Will the personal services income provisions require income to be attributed to the individual? | No.

Relevant facts and circumstances: The Trust is in the business of writing loans. The Trust uses the services of an individual to carry out all activities on its behalf. The Trust derives its income from writing home loans and residential investment property loans. The Trust writes loans to unrelated clients under the licence of a registered mortgage broker, Company X. The Trust is acting as an agent for Company X and under the licensing requirements with ASIC, all commissions payable by financial institutions for loans written must be paid to Company X as the license holder. Company X pays X% of all commissions received to the business writer (the Trust). The remaining Y% is retained by Company X to cover marketing, administrative support and use of its resources (including business premises as and when required). The Trust receives 100% of its income from upfront and trail commissions received from Company X. No income sourced from an individual client comprises 80% or greater of the income that is paid to the Trust by Company X. The Trust does not have its own premises as it is a mobile lender. However it will use the office of Company X where office premises are required to finalise loan documents with clients who find it more convenient to meet in the city centre. No amount is specifically paid by the Trust to Company X when the premises of Company X are used as this forms part of the commercial arrangement between the two entities and was agreed to as part of Company X's Y% retention from income derived by the Trust through the use of Company X's licence. The Trust generates new business by advertising in the media, cold calling accountants, financial planners and solicitors and using the business relationship networks of the individual.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 84-5 | Income Tax Assessment Act 1997 Section 86-1 | Income Tax Assessment Act 1997 Subsection 86-15(2) | Income Tax Assessment Act 1997 Se ction 87-15 | Income Tax Assessment Act 1997 Section 87-20 | Income Tax Assessment Act 1997 Section 87-40 | Income Tax Assessment Act 1997 Subsection 87-40(2) | Income Tax Assessment Act 1997 Subsection 87-40(4) | Income Tax Assessment Act 1997 Subsection 87-40(5)

Reasons for decision: Summary: Section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997) defines the personal services income (PSI) of an individual as being income which is mainly a reward for that person's personal efforts or skills. A personal services entity (PSE) is a company, partnership or trust whose ordinary or statutory income includes the PSI of one or more individuals (subsection 86-15(2) of the ITAA 1997). In this case, the Trust uses the services of an individual to carry out mortgage broking activities on its behalf as an agent for Company X. Based on the information provided, the Commissioner is satisfied that the income received from the mortgage broking activities is mainly a reward for the personal efforts or skills of the individual and is therefore PSI. It follows that the Trust is a PSE. A PSE conducts a personal services business if a personal services business determination is in force or if the entity meets at least one of the four personal services business tests in the relevant income year. The four tests are the results test, unrelated clients test, employment test and business premises test (section 87-15 of the ITAA 1997). Provided that 80% or more of an entity's PSI does not come from one client, a PSE will meet the unrelated clients test under section 87-20 of the ITAA 1997 during an income year if: • the PSE gains or produces income from providing services to two or more entities that are not associates of each other, and are not associates of the PSE; and • the services are provided as a direct result of the PSE making offers or invitations (for example, by advertising), to the public at large or to a section of the public, to provide the services. Section 87-40 of the ITAA 1997 modifies the operation of the 80% rule and unrelated clients test for agents of another entity if the following criteria in subsection 87-40(2) is satisfied: (a) the individual or personal services entity of another entity is an agent of the other entity (the principal) but not the principal's employee; and (b) the agent receives income from the principal that is for services that the agent provides to other entities (customers) on the principal's behalf; and (c) at least 75% of that income is commissions, or fees, based on the agent's performance in providing services to the customer on the principal's behalf; and (d) the agent actively seeks other entities to whom the agent could provide services on the principal's behalf; and (e) the agent does not provide any services to the customers, on the principal's behalf, using premises: (i) that the principal or an assessable of the principal owns; and (ii) in which the principal or an associate of the principal has a leasehold interest; unless the agent uses the premises under an arrangement entered into at arm's length. If the criteria is satisfied, the special rules will apply to provide that: • for the purposes of the 80% rule, the income is treated as if it were PSI from the customer, and not PSI from the principal (subsection 87-40(4) of the ITAA 1997), and • for the purposes of the unrelated clients test, any services are treated as if the agent, and not the principal, provided them to the customer (subsection 87-40(5) of the ITAA 1997). In this case, the Trust satisfies the criteria in subsection 87-40(2) given that: (a) the Trust is an agent of Company X and not an employee; (b) the Trust receives income from Company X resulting from mortgage broking to Company X's customers; (c) at least 75% of the Trust's income will be commissions based on providing services to Company X's customers; (d) the Trust actively seeks customers on behalf of Company X; and (e) although the Trust provides some services at premises owned by Company X; we accept that the use of those premises is obtained as part of a commercial arrangement entered into at arm's length with Company X. Consequently, as the Trust meets the criteria in subsection 87-40(2), the special rules for agents will apply to provide that: • for the purposes of the 80% rule, the income is treated as if it were PSI from the customer, and not PSI from Company X, and • for the purposes of the unrelated clients test, any services are treated as if the Trust, and not Company X, provided them to the customer. Therefore, the Trust conducts a personal services business as it passes the unrelated clients test and meets the 80% rule on the basis of the special rules for agents. Section 86-1 of the ITAA 1997 provides that income from personal services is attributed to the individual if it is the income of another entity (and is not promptly paid to the individual as salary) unless the other entity is conducting a personal services business. In this case, it has been established that the Trust is conducting a personal services business and therefore it will not be required to attribute the income to the individual.