Private ruling: Personal Services Income or Business Structure Income
Published: April 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Whether any amount of the professional practice's income would be required to be attributed to an individual by the personal services income provisions? | A1: No

Relevant facts and circumstances: The trustee of a trust (you) has applied for a ruling for the 2011-12 financial year about whether the income produced by the professional practice that you operate with one principal, (the individual), is personal services income or income from a business structure. You operate a professional practice that has a number of staff, including a number of employees who are non principal practitioners. The non principal practitioners each produce fees; the clients of the practice are invoiced for the work performed by the individual and the employee professional practitioners. You state that in line with the usual practice of professional firms, the invoices issued to clients dissect the work performed based on who has performed the work. Charging is based on the usual time spent basis of professional firms. Information provided stated the estimated amount that the non principal practitioners would produce in the 2011-12 financial year income year as well as the gross value of the work performed by the individual in the 2011-12 financial year. You provided information stating that the practice had substantial assets that are used to generate income such as computers, software, library subscriptions, specialised professional software and an office manual for the practice. In addition to those assets the practice has a substantial asset in the form of work in progress.

Relevant legislative provisions: Section 84-5 of the Income Tax Assessment Act 1997 .

Reasons for decision: Summary: You are seeking a ruling on whether the income of the professional practice, including the provision of the principal individual's services as a professional would be income from a business structure as opposed to it being income from the personal services of an individual. The measure contained in Divisions 84 to 87 of the Income Tax Assessment Act 1997 (ITAA 1997) only applies if a taxpayer has income that is personal services income (of an individual). The definition of personal services income is contained in subsection 84-5(1) of the ITAA 1997 which states: Your ordinary income or statutory income, or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income). The definition refers to income (including ordinary income or statutory income of any entity) that is mainly a reward for an individual's personal efforts or skills. Subsection 84-5(3) of the ITTA 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 service provider's personal effort or skills. The fact that income is payable under a contract does not stop the income being mainly a reward for a service provider's personal efforts or skills (subsection 84-5(4) of the ITAA 1997). The reference to the income that is mainly a reward for the personal efforts or skills of a service provider requires a conclusion as to the substance of contractual arrangements between the relevant parties to those contracts. The Macquarie Dictionary (Second Revision) defines "mainly" as: chiefly; principally; for the most part Whether the provision of the personal efforts or skills of a service provider to a service acquirer is the chief or the principal component of a contract will depend on the terms and conditions of that contract. Income from personal services is to be distinguished from income that is mainly: · for the supply of goods; · for the granting of a right to use property · for the use of assets in the income producing activities and where those assets generate the income for the entity. | Detailed Reasoning - Income from a business structure is not personal services income: The alienation measure does not apply to businesses that have a substantial profit-yielding structure. The distinction between income that is mainly a reward for personal efforts or skills and income from a business structure will need to be made having regard to factors such as the number of arm's length employees or others engaged to perform work, the presence of goodwill, the extent to which income-producing assets are used to derive the income, the nature of the activities carried out, the size of the operation and the extent to which the income is dependent upon a particular individual's own personal skills, efforts or expertise. Taxation Ruling TR 2001/7 Income tax: the meaning of personal services income provides examples of the distinction between income derived from personal services and income derived from the supply and sale of goods, use of income-producing assets, and business structure. Taxation Ruling IT 2639 Income Tax: Personal Services Income expands upon the factors that are considered for whether income is from a business structure. 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. Paragraph 8 of IT 2639 states that the extent of the connection between the income concerned and the services rendered by the particular taxpayer involved is crucial in determining whether or not the income is the personal services of the individual or whether it is from a business structure. The paragraph identifies factors that need to be considered in determining whether a taxpayer derives income from personal services, although no one factor is determinative. The factors identified are the nature of the taxpayer's activities, the extent to which the income depends upon the taxpayer's own skill and judgement, the extent of the income producing assets used to derive the income and the number of employees and others engaged. These factors are discussed below. Paragraph 10 of IT 2639 states that, as a general rule of thumb, if there are as many non-principal practitioners as there are principal practitioners, then this may indicate that the income is from the business structure rather than from the personal services of an individual. However, all the factors in paragraph 8 of IT 2639 need to be considered. Paragraph 11 of IT 2639 defines "practitioners" as professional and non professional staff whose function is to derive material fees for the practice. The term practitioner does not include clerical or support staff. | Detailed Reasoning - 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. The activities of consultants, salespersons, journalists, life insurance agents and tradespersons are also likely to give rise to income from personal services. These examples are far from being exhaustive. The structure of the professional practice is a conventional arrangement normal to the particular profession. There is one principal professional, and more than one non principal practitioner. | Detailed Reasoning - 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. The principal individual would be providing professional services as a principal along with more than one employee non principal practitioner. The income from the professional services would be derived from the efforts of the practice as a whole rather than being dependent upon the services of any particular individual. | Detailed Reasoning - The extent of the income producing assets used to derive the income: The more substantial the income producing assets employed within a practice the more likely it is that the income of the practice will be derived from the business structure rather than from the rendering of personal services. For example, the array of equipment used by radiologists and pathologists may often suggest that their income is being derived from the business structure. However, minor equipment such as the drawing board of an architect or the heart monitor/blood pressure machine of a medical practitioner would not suffice to change what would otherwise be personal service income into income from the business structure. The expression "income producing assets" is used in this context to include any investment of the practice in tangible business assets such as premises, fixtures and fittings, plant, equipment and industrial or intellectual property (whether owned or leased). However, the significance of these assets would have to be weighed against their relevance to the derivation of income - given the other factors mentioned in this paragraph. TR 2001/7 , at paragraph 31, states that the determination of whether income is mainly a reward for the personal efforts or skills of an individual or whether it is generated by the sale of goods, granting of a right to use property, supply and use of assets or business structure, requires practical judgement as to whether the value contributed by the efforts or skills of the individual exceeds the value of other inputs such as plant and equipment, intellectual or other property or goodwill. You state that the practice utilises computers, software, library subscriptions and specialised professional software. Further the work in progress is a substantial asset of the practice. The use of computers, software, library subscriptions and specialised professional software, the size of the business and the substantial work in progress would indicate the existence of a business structure. | Detailed Reasoning - The number of employees and others engaged: The more substantial the number of employees, practitioners or technicians used in a practice the more probable it is that the income is derived from the business structure rather than from the rendering of personal services (see Henderson v. F.C. of T . 70 ATC 4016; (1970) 1 ATR 596). For example, large accounting and legal firms with tens, or even hundreds, of practitioners but without extensive or substantial equipment would also be considered to be generating their income from their business structure. In addition to the fees generated by the principal the practice would have more than one employee professional who also generates fees. | Summary: It is considered that the income from the professional practice is income from a business structure. We have reached this conclusion based on the fact that there are more employee professionals than principal practitioners, and that the fees are generated by the principal and non principal employees rather than being dependent upon the personal services of a particular individual. Further information provided indicates the use of substantial assets in the form of computers, software, library subscriptions and specialised professional software as well as work in progress. Consequently, the Commissioner considers that the income of the practice from providing professional services would be income from a business structure. Accordingly as the income is not considered personal services income, it is not required to be attributed to the individual under the personal services income rules and those rules do not apply.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.