Private ruling: Subject :
Date of advice: 11 May 2026
Published: 27 July 2026
Ruling period: Income year ended 30 June 20YY | Income year ending 30 June 20YY

Ruling: Q1: Is the ordinary income of the company derived from advisory services provided by person B alone, personal services income (PSI) of person B under section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is the ordinary income of the company derived from advisory services requiring the input of person B and other employees of the company with specialised skills, PSI of person B under section 84-5 of the ITAA 1997? | A2: No.

Relevant facts and circumstances: 1. The company is an Australian resident for tax purposes and commenced business on X XX 20YY. 2. Person B is the founder and sole director of the company. They have X years' industry experience. 3. Since its commencement, the company has been contractually engaged by clients to provide specialised economic consulting services, mostly in connection with litigation. 4. These services typically fall into 2 categories. The first is purely advisory and is provided by person B without any input from anyone else. As at X X 20YY, these type of engagements accounted for approximately X% of the ordinary income generated by the company. 5. In addition to being advisory, the second category also relies on quantitative analysis performed by specialist staff (other than person B), the ultimate deliverable often being the provision of an expert report for filing as expert evidence in court. As at X X 20YY, these type of engagements accounted for approximately X% of the ordinary income generated by the company. 6. The reports delivered by the company to its clients contain both opinion and detailed numerical analysis on which the opinion is based. The detailed numerical analysis is carried out by specialist staff (other than person B) employed by the company under person B's direction. According to person B, they do not possess all the required technical skills to carry out the numerical analysis themself, and the nature of the work is such that it requires close collaboration and relies on combining extremely specialised knowledge. 7. The company pays person B an hourly rate, equivalent to the salary they earned when previously employed at a large firm, with an uplift to reflect the casual nature of their employment with the company. The company similarly pays the other staff an hourly rate equivalent to the salary that would be earned elsewhere in the industry, plus a casual loading. 8. As at X X 20YY, the number of employees (other than person B) engaged by the company was X. This number is anticipated to grow as both the company's business grows, and more projects reach the expert report stage such that the need for specialised staff grows. 9. Person B is not personally contracted by clients, but the engagement terms (for the company's engagement) usually specify that the report to be delivered by the company is to be signed by person B. Where relevant, the terms of engagement also acknowledge that other (unnamed) consultants will work on the analysis, under person B's direction. The terms of engagement further provide for a fixed fee for specified deliverables, or hourly rates for person B and the other consultants. 10. There is a significant margin between the market-based hourly rate paid by the company to its employees (including person B) and the income the company earns from its engagements. According to person B, the margin represents a return on the company's reputation and know-how. 11. According to person B, the company would have no services to offer without them, but equally they are not able to offer their services without the back-up and support of other consultants. The company's services are provided in competition with other economic consulting firms, not sole practitioners. Other consulting firms tend to have tens to hundreds of staff. 12. As at X X 20YY, the company had worked on X projects for X different clients, meaning it is generating repeat business.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 84-5 | Income Tax Assessment Act 1997 subsection 84-5(1) | Income Tax Assessment Act 1997 subsection 84-5(2) | Income Tax Assessment Act 1997 Division 85 | Income Tax Assessment Act 1997 Division 86 | Income Tax Assessment Act 1997 Division 87 Further issues for you to consider | This private ruling is confined to the questions addressed in the ruling. | As the company derives both PSI and non-PSI income, the PSI provisions may apply to the component of income that is characterised as PSI. To the extent that an amount is characterised as PSI, that component may be subject to the income attribution and deduction limitation rules under Divisions 85 and 86 of the ITAA 1997, while the remaining income is assessable to the company under ordinary principles. | To the extent that income derived by the company is characterised as PSI (as is the case for the advisory services), the application of the personal services business (PSB) tests in Division 87 must be considered separately to determine whether the attribution and deduction provisions apply to that income. This includes consideration of: | • the results test; | • the unrelated clients test; | • the employment test; and | • the business premises test. | The company is required to self-assess whether it satisfies any of these tests for the relevant year. If the company does not satisfy any of these tests, it may apply to the Commissioner for a PSB determination. Whether such a determination would be granted will depend on the company's specific circumstances. | If the company satisfies any of these tests, it will be treated as conducting a PSB, and the attribution and deduction limitation rules under Divisions 85 and 86 of the ITAA 1997 will not apply to that income.

Reasons for decision: Summary: The ordinary income of the company derived from advisory services: • is PSI of person B under section 84-5 where it is provided by person B alone; and • is not PSI of person B under section 84-5 where it requires the input of person B and other staff with specialised skills. | Detailed Reasoning - Detailed reasoning: Subsection 84-5(1) states that '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)'. Taxation Ruling TR 2022/3 [1] is about the PSI rules and considers how to identify PSI. Paragraph 3 of TR 2022/3 provides a list containing non-exhaustive examples of income that will clearly be PSI and includes both income of a professional person practicing on their own account without professional assistance and income derived by consultants from the exercise of personal expertise. Only individuals can have PSI (subsection 84-5(2)). It can be earned directly by a sole trader or indirectly through an interposed entity referred to as a personal services entity (PSE). A PSE is described in paragraph 23 of TR 2022/3 to include a company that receives the PSI of one or more test individuals and is interposed between the individual providing the work or services and the service acquirer. The reference here to a 'test individual' is a reference to the person who is contracted to perform the services or who is responsible for performing the services that generates their PSI when working as a sole trader or through a PSE (paragraph 29 of TR 2022/3). Paragraph 37 of TR 2022/3 explains that the use of the word 'mainly' in subsection 84-5(1): ... means that the income referred to needs to be 'chiefly', 'principally' or 'primarily' a reward for the provision of the personal efforts or for the exercise of the skills of an individual. That is, more than half (50%) of the ordinary or statutory income received is required to be a reward for the personal efforts and skills of an individual rather than being generated by the use of assets, the sale of goods or by a business structure... Where the PSE has entered into contracts with a service acquirer, the PSE will be considered to have derived the income and the PSI rules may apply. Income which is generated from the business structure of an entity is not PSI. In this regard, paragraphs 43-45 of TR 2022/3 relevantly provide: 43. Where income is derived by an entity which has substantial income-producing assets or a number of employees, or both, the income is more likely to be generated by the profit-yielding structure of the business rather than from the rendering of personal services. 44. Entities may have regard to the following factors to determine whether their income is mainly a reward for the personal efforts or skills of individuals or is derived from a business structure: • the number of arm's length employees or others engaged by the entity to perform work and their relative contribution to the income earning activities • the existence of goodwill • the extent to which income-producing assets of the business 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 ... 45. The fact that services are performed through an entity that is not an individual does not automatically mean that income received by the entity in respect of those services is generated from a business structure. The factors listed in paragraphs 43 to 44 of this Ruling must be applied to each test individual's particular circumstances to assess whether the income is generated from a business structure or whether it is generated from the test individual's own personal skills, efforts or expertise. The ordinary income of the company derived from advisory services requiring the input of person B and other staff with specialised skills is considered to be income generated from the business structure of the company, and therefore is not PSI of person B. Factors which indicate that such income is derived from the company's business structure include: • The company is engaged under contract by the service acquirer and the economic consulting/advisory services the company is engaged to provide under these engagements involves both opinion and detailed numerical analysis. • The detailed numerical analysis is not carried out by person B but by other employees of the company who possess the requisite specialised skills and capabilities to carry out that analysis; person B does not possess all the required technical skills to carry out the numerical analysis themself. • While this income relies on the application of person B's personal expertise, effort and skills, the service requires close collaboration between the company's employees and relies on the combination of their extremely specialised knowledge such that it is not one that the company (or person B) could offer without the contribution from the other employees. • The services are not marketed as those of person B's alone, but those of the company and the terms of the company's engagement acknowledge that consultants other than person B will work on the analysis. • The nature of these services is such that they are typically provided by small to medium-sized firms (not sole practitioners) and the company provides them in competition with other consulting firms. • The number of employees employed by the company to apply their specialised skills to these services will rise as the size of the company's operation establishes further and grows. • In its short history, the company has already developed ongoing client relationships and generated repeat engagements and is likely to have established some goodwill. • The company has, and relies on, its reputation and know-how which are arguably applied to generate its income. In contrast, the general impression gained in relation to the ordinary income of the company derived from advisory services provided by person B alone is that it is not income generated from the profit-yielding structure of the company's business. The economic consulting/advisory services the company is engaged to provide under these engagements do not require the type of detailed numerical analysis otherwise carried out by the company's other employees with the specialised skills and capabilities required to do that, hence why they are performed solely by person B. Such income is chiefly, principally or primarily (i.e. mainly) a reward (or would mainly be such a reward if it was person B's income) for the provision of the personal efforts, and/or for the exercise of the skills or personal expertise, of person B, and is therefore PSI of person B. [1] Income tax: personal services income and personal services businesses.