Private ruling: Personal services income
Date of advice: 21 April 2017
Published: September 2017
Ruling period: Year ended 30 June 20YY | Year ending 30 June 20ZZ
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the Company have 80% or more of the personal services income (PSI) from one client? | A1: No

Relevant facts and circumstances: Individual X provides consultancy services through the Company. The Company has two clients, Joint Venture 1 and Joint Venture 2. Joint Venture 1 has two joint venture partners - Coy A and Coy B; Joint Venture 2 has the same joint venture partners but under a different arrangement between Coy A and Coy B. The Company is generating 100% of personal services income (PSI) from these two Joint Ventures. The contract specifies a daily rate of payment for providing consultancy services. The Company invoices for professional services and expenses incurred are rendered monthly for work performed in the prior month. The contract can be ended at any time by either party upon the written or verbal advice from the other party. In either case, the Company is entitled to an invoice and to be paid for the services provided up until the end date. The Company has been engaged by Coy C to work for them by word of mouth referral from Coy A. Coy C is not associated in anyway with Coy A or Coy B. The Company has made it known within the industry that they are looking for contract work. The Company is expecting to generate more than 20% of PSI from Coy C.

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

Reasons for decision: Summary: Section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997) defines 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 PSI of one or more individuals (subsection 86-15(2) of the ITAA 1997). In this case, Individual X provides consultancy services through the Company; the income received is PSI as the income is mainly a reward for personal efforts or skills. An individual or PSE conducts a personal services business if a personal services business determination is in force or if the individual or 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). Note 2 to subsection 87-15(1) of the ITAA 1997 states that the personal services business tests, apart from the results test under section 87-18, do not apply if 80% or more of the PSI is from one source. In this case, the contract between the Company and its clients specifies a daily rate of payment, with payments to be made on a monthly basis. The Company does not meet the results test as payments are for work performed during the month and not upon completion of a specified result (section 87-18 of the ITAA 1997) Before applying the remaining tests, the next step is to apply the 80% rule. 80% rule looks at whether 80% or more of the PSI from one client (and their associates) in an income year. Taxation ruling TR 2001/8 Income tax: what is a personal services business provides that the word 'associate' has the same meaning as in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). A client's associates can include the client's: ● relatives ● partner in a business partnership and their spouse or children ● trustee of a trust that they (or an associate) benefit from ● company which is under their (or their associate's) control ● beneficiary or their associates, if the client is a trustee, or ● controlling entities, if the client is a company. If PSI is received from one client and an associate of this client, the PSI needs to be treated as if it comes from one client (that is, one source). Paragraph 87 of the TR 2001/8 states that the source of income is determined by reference to the entity that has entered into the contractual obligation with the individual or PSE which gives rise to the relevant amount of ordinary or statutory income that is the PSI of the individual or the PSE. Paragraph 142 of the TR 2001/8 provides an example of “Bob” is a mining engineer who enters into discrete contracts for the provision of his personal services with 3 joint venture partners (Pebble Ltd, Rock Ltd and Boulder Ltd). On completing each of his contracts, Bob invoices the relevant company for payment. Pebble Ltd, Rock Ltd and Boulder Ltd have an agreement between themselves whereby Pebble Ltd makes payment on all invoices received by any venture partner in relation to joint venture activities. Rock Ltd and Boulder Ltd reimburse Pebble Ltd for payments made on their behalf. In each case, the source of Bob's personal services income is the company which has been invoiced. This is because in each case it is the company with which Bob has contracted and who he will need to pursue in the event of non-payment. In this case, the Company has two clients, Joint Venture 1 and Joint Venture 2; Both Joint Ventures have the same joint venture partners - Coy A and Coy B. it is considered that Joint Venture 1 and 2 are associates of each other as both Joint Ventures are controlled by the same entities. The Company has been engaged by Coy C to work for them directly. Coy C is not associated with Coy A or Coy B; The Company is expecting to generate more than 20% of PSI from Coy C. Consequently, the Company does not receive 80% or more PSI from one client.