Private ruling: Personal Services Income
Date of advice: 31 October 2018
Published: February 2019
Ruling period: 1 July 2015 to 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Questions and Answers | 1. Are the amounts received by the trustee for the Business Trust pursuant to the Profit Share Agreements included in the net income of the Business Trust as defined in Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)? | Yes | 2. Are the amounts received by the trustee for the Business Trust personal services income of Person A pursuant to Section 84-5 of the Income Tax Assessment Act 1997 ? | No | 3. Does Part IVA of the ITAA 1936 apply to the arrangement? | No

Relevant facts and circumstances: The Business Trust is a trust constituted by deed. The Business Trust and all beneficiaries are residents of Australia for tax purposes. The Business Trust carries on a business in procurement. It acts as an intermediary between supplier and customer. The Business trust is not responsible for the products provided by the Supplier, as all details regarding the supply are passed from the Supplier to the Customer for acceptance. Any warranties are provided by the Supplier. Where the Business Trust is unable to source the product at the specified price, the Business Trust would contact the Customer to advise that it could not fulfil the Order. In addition to the procurement business, some customers might request the Business Trust to test the product. In that instance, the Business Trust would engage third party contractors to undertake the testing. The testing of equipment is separate to the agreement for supply. In the event that the Customer wishes to dispute the goods received, the Business Trust will assist the Customer in the process of the claim against the Supplier but is not financially liable for the goods supplied by the Supplier. Such disputes relate to the quality of the Product. No income is derived by the Business Trust until the end of the process, that is, when the supplier is paid. If the supplier is not paid, then the Business Trust does not derive any income. With respect to the operation of the Business Trust, there are three individuals who provide its services, Person A, Person B and Person C. Person A is involved in a small fraction of the Business Trusts activities. Person B is responsible for the majority of the activities with Person C responsible for the remainder. All receipts are banked into the Trusts bank account. The Trust does not pay salary/wages to any person. Person A and Person B are the named beneficiaries of the Trust. The Trust makes distributions to the three individuals commensurate with the efforts they provide. Any remaining trust income is distributed to a company. If the trust structure was not in place the individuals would receive and equivalent amount of income in another form, i.e. salary.

Relevant legislative provisions: Section 95 Income Tax Assessment Act 1936 | Part IVA Income Tax Assessment Act 1936 | Section 6-5 Income Tax Assessment Act 1997 | Division 84 Income Tax Assessment Act 1997 | Division 85 Income Tax Assessment Act 1997 | Division 86 Income Tax Assessment Act 1997 | Division 87 Income Tax Assessment Act 1997

Reasons for decision: Summary: Are the amounts received by the trustee for the Business Trust pursuant to the Profit Share Agreements included in the net income of the Business Trust as defined in Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)? Generally, the net income of a trust estate is the total assessable income of the trust estate calculated under the Income Tax Assessment Act 1936 (ITAA 1936) and Income Tax Assessment Act 1997 (ITAA 1997) as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions. Noting; that there are some exceptions that are not relevant in this case. Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes income according to ordinary concepts. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: ● are earned· ● are expected· ● are relied upon, and· ● have an element of periodicity, recurrence or regularity. The payments the trust receives is income from carrying on a business it forms part of the assessable income of the trust and accordingly is part of the net income of the trust. Are the amounts received by the trustee for the Business Trust personal services income of Person A pursuant to Section 84-5 of the Income Tax Assessment Act 1997 ? The alienation measures contained in Divisions 84 to 87 of the Income Tax Assessment Act 1997 (ITAA 1997) only apply if a taxpayer has income that is personal services income (of an individual). Personal services income is income that is mainly a reward for an individual's personal efforts or skills (or would be mainly such a reward if it was the income of the individual who did the work). Personal services income does not include income that is mainly: ● from an entity supplying goods or granting a right to use property ● generated by assets an entity holds ● generated by the business structure. Income from the business structure refers to income other than income from personal services. Income derived by a firm or practice which has substantial income producing assets, or many employees, or both, is more likely to be generated from the income yielding structure of the business rather than from the rendering of personal services. Whether a taxpayer derives income from rendering personal services is a question of fact and degree to be determined in the circumstances of each case. The crucial issue is the extent of the connection between the income concerned and the services rendered by the particular taxpayer involved. The following factors need to be considered in determining whether a taxpayer derives income from personal services, though no one factor is determinative. a. The nature of the taxpayer's activities The activities of salary and wage earners and professionals practising on their own account clearly generate personal services income. Radiologists or pathologists who operate on their own account, however, often employ many technical staff and operate an array of technical equipment. Their income is generated from the business structure rather than from their rendering of personal services. b. The extent to which the income depends upon the taxpayer's own skill and judgment The more the income producing activities involve the exercise of the taxpayer's own skill and judgment the more probable it is that the income will be derived from personal services rather than from the business structure. c. The extent of the income producing assets used to derive the income