Private ruling: Personal services income
Date of advice: 6 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you subject to the personal services income alienation rules? | A1: No

Relevant facts and circumstances: You are a sole trader providing consultancy services. You have been engaged for the design of multimedia resources, including scriptwriting, editing and quality assurance for online resources. You work from home and provide your own equipment and software. You charge an hourly rate and invoice each client at the conclusion of a project. You normally would be contracted by more than one client; however, in 2015-16FY, you only had contracts with one client. You had Professional Indemnity Insurance Cover. You were liable for the cost of rectifying any defective work.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 84-5 | Income Tax Assessment Act 1997 section 87-15 | Income Tax Assessment Act 1997 subsection 87-18(1) | Income Tax Assessment Act 1997 subsection 87-18(2) | Taxation Administration Act 1953

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. Subsection 84-5(3) of the ITAA 1997 extends the definition of personal services income to income that is for doing work or for producing a result. The result must be produced from the individual's personal efforts or skills. Taxation Ruling TR 2001/7 Income tax: the meaning of personal services income provides that implicit in the word mainly is that more than half of the relevant amount of the statutory or ordinary income, of the entity, under the contract is income that is a reward for the personal efforts or skills of an individual. In your case, you provide consultancy services and it is evident that the income derived is will be a reward for your personal efforts or skills. Therefore, the income generated is classified as personal services income. Section 87-15 of the ITAA 1997 provides that an individual conducts a personal services business if the individual 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(1) of the ITAA 1997 provides that an individual meets the results test in the relevant income year if, in relation to at least 75% of the individual’s personal services income a) the income is for producing a result; and b) the individual is required to provide the equipment or tools necessary to do the work; and c) the individual is, or would be, liable for the cost of rectifying any defects in the work performed. Subsection 87-18(2) of the ITAA 1997 provides that, the income for producing a result does not apply to: a) the individual receives as an employee; or b) the individual receives as an individual referred to in paragraph 12-45(1)(a), (b), (c), (d) or (e) (payments to office holders) in Schedule 1 to the Taxation Administration Act 1953 (TAA); or c) a payment to in section 12-47 in Schedule 1 to TAA (payments to religious practitioners). In your case, the contract between you and your client was to produce a specified result, the payments were based on the result of each project; you provided your own equipment and software; you were liable for any claims or legal action brought about in relation to the work performed by you. Moreover, you did not receive the income as an employee. Therefore, you pass the results test and you are conducting a personal services business. You are not subject to the personal services income alienation rules.