Private ruling: Personal services income
Date of advice: 3 April 2019
Published: May 2019
Ruling period: Year ended 30 June 2020
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the income that will be derived by Company X your personal services income under section 84-5 of the Income Tax Assessment 1997 ? | A1: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Current situation Company Y carries on a business. It actively manages Fund Z. Company Y receives a fee from Fund Z. You are currently employed by Company Y to help with the management of Fund Z. There are other employees employed by Company Y in regard to its management of Fund Z. Proposed new structure It is proposed that the function currently being performed by Company Y for Fund Z, be sub-contracted under a new agreement to the newly established Company X. To perform the services under the agreement, Company X will employ you and the other aforementioned employees of Company Y, along with a new employee. You will receive a base salary equal to amount you currently receive from Company Y. The other former Company Y employees will be employed on equivalent remuneration as they were paid by Company Y. Company X will operate from a separate leased office for which it will pay market rent. It will also incur all other costs required to operate the business, such as hire of equipment, outsourced support services, technology and communication costs and other overheads.

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

Reasons for decision: Summary: The income derived by Company X is not your personal services income. | Detailed Reasoning - Whether the income is personal services income: The personal services income (PSI) 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 PSI. The definition of PSI is contained in subsection 84-5(1) of the ITAA 1997.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 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. There are specific items of income that do not possess the characteristics of PSI, namely income amounts produced from: a) the sale or supply of goods; b) the granting of a right to use property; c) the supply and use of assets that have a significant role in the generation of the income; or d) from the business structure rather than an individual’s efforts or skills. Relevant to your scenario would be whether the income was produced from a business structure. | Detailed Reasoning - Business structure: PSI does not include amounts that are generated from the income yielding structure of a business rather than from the rendering of 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. For example, 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). Thus, 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. 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 i. the nature of the activities carried out, ii. the number of arms-length employees or others engaged to perform work, iii. the presence of goodwill, iv. the extent to which income-producing assets are used to derive the income, v. the size of the operation, and vi. the extent to which the income is dependent upon a particular individuals own personal skills, efforts or expertise. These factors are not determinative in isolation but need to be considered as a whole. | Detailed Reasoning - Nature of the activities: Company X’s operation is the provision of services to Fund Z. Taxpayers undertaking the activities would use their own skill and expertise to make the decisions necessary to operate. However with consideration of other factors, this does not stop the income from being produced by a business structure. | Detailed Reasoning - Number of arms-length employees or others engaged to perform work: You will not be alone in carrying out Company X’s duties. Company X will employ other employees. They will support the objective of providing the services to Fund Z. Company Y will continue to perform other services to Fund Z. These services will not form part of Company X’s operation. | Detailed Reasoning - The presence of goodwill: The operation will be new and therefore will have no goodwill at commencement | Detailed Reasoning - The extent to which income-producing assets are used to derive the income.: Company X will incur costs on assets and expenses in order to generate income. They will operate from a leased office space to undertake the activities. Equipment will be hired, support services will be obtained and technology will be purchased in order to operate. These assets and expenses will help generate the income of the operation. | Detailed Reasoning - The size of the operation: The size of the operation is modest. However the income generated from the structure will be large despite its mo dest employee structure, the significant amount of income generated indicates a more involved operation. | Detailed Reasoning - The extent to which the income is dependent upon a particular individual’s own personal skills, efforts or expertise: The operation appears to work as a whole to provide the required services. The employees will all be performing similar functions. The employees will be undertaking similar roles meaning you will not be performing a significant aspect of the operation by yourself. The income generated will not be dependent on a particular individual’s skills or expertise. In this case the income producing activities will be generated in combination with other employees which means it is more likely to be income generated from a business structure. | Detailed Reasoning - Conclusion: On balance, the income of the company is from a business structure. Therefore the income earned by the company will not be considered your personal services income.