Private ruling: Personal services income alienation rules
Date of advice: 7 February 2017
Published: July 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Company be subject to the personal services income alienation rules? | A1: No.

Relevant facts and circumstances: Individual X provides professional services and currently has a contract with Entity X to provide services to numerous unrelated clients each year. Individual X provides their services from the premises of Entity X. Each client is invoiced directly by Individual X. Entity X invoices Individual X for office rental, computer and other services. Individual X provides their own personal equipment. Individual X has professional indemnity insurance cover. The contract between Individual X and Entity X specifies that Individual X will be liable for any claims or legal action brought against them in relation to the services provided to their clients. Individual X lodged their most recent income tax return on the basis that they were earning personal services income and they passed the personal services income results test. Individual X intends to restructure the contact with Entity X by establishing an incorporated entity (the Company). Individual X will be an employee of the Company. The Company will contract with Entity X for the services of Individual X. The Company will invoice clients for the services performed by Individual X and Entity X will invoice the Company for office rental, computer and other services. The contract between the Company and Entity X will specify that the Company will be liable for any claims or legal action brought about in relation to the services provided to the clients of Individual X.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 84-5 | Income Tax Assessment Act 1997 subsection 86-15(1) | Income Tax Assessment Act 1997 subsection 86-15(2) | Income Tax Assessment Act 1997 Section 87-15 | Income Tax Assessment Act 1997 Subsection 87-18(3)

Reasons for decision: Summary: Section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997) defines the personal services income of an individual as being income which is mainly a reward for that person's personal efforts or skills. A personal services entity is a company, partnership or trust whose ordinary or statutory income includes the personal services income of one or more individuals (subsection 86-15(2) of the ITAA 1997). In this case, the Company will provide consulting services through Individual X and it is evident that the income derived will be a reward for the personal efforts or skills of Individual X. Therefore, the Company will be a personal services entity. A personal services entity will be subject to the personal services income alienation rules unless it conducts a personal services business. Under the alienation rules, the personal services income of a personal services entity is attributed to the individual or individuals who perform the work (subsection 86-15(1) of the ITAA 1997). Section 87-15 of the ITAA 1997 provides that a personal services entity conducts a personal services business if it meets at least one of the four personal services business tests or if there is a personal services business determination in force. Subsection 87-18(3) of the ITAA 1997 provides that a personal services entity meets the results test in the relevant income year if, in relation to at least 75% of the personal services income of one or more individuals that is included in the entity's income for the year: a) the income is for producing a result; and b) the personal services entity is required to provide the equipment or tools necessary to do the work; and c) the personal services entity is, or would be, liable for the cost of rectifying any defects in the work performed. Income is for producing a result when the essence of the contract is to achieve a specific result and not to do work. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. In this case: a) the clients of Individual X are required to pay on completion of the services rendered; b) the Company will provide the equipment necessary to do the work either through Individual X or by paying Entity X for the equipment; and c) the Company will be liable for any claims or legal action brought about in relation to the work performed by Individual X. Consequently, the Company will meet the results test as: a) the income is for producing a result; b) the Company is required to provide the equipment necessary to do the work; and c) the Company will be liable for the cost of rectifying any defects in the work performed. Therefore, as the Company will meet the results test, it will be a personal services business and will not be subject to the personal services income alienation rules.