Private ruling: Personal services income
Date of advice: 10 March 2016
Published: May 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2015

Ruling: Questions and answers | 1. Does the income which is received by the company include the personal services income of the director and another employee? | Yes | 2. Is the income of the company generated from a business structure? | No | 3. Is the income of the company still personal services income of an individual, if one of the employees is engaged as a contractor through another entity which they control, rather than being an employee of the company? | Yes

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. The company provides a medical service to patients, who are referred by medical practitioners. The company has two non-individual shareholders. The company has one director who is also a part-time employee. The director controls one of the shareholders and owns more than 50% of the shares in the company. The company also employs another part-time professional. This individual controls the other shareholder. These two part-time employees perform the services. Both perform the same duties; only one is required for each patient. The results are interpreted by another person. The other person works as a contractor for the company. The skills of the professional, the equipment and the skills of the other person are all necessary for the business. Equipment used in the business consists of one machine necessary to the service provided. The company issues invoices to the patient directly in its name comprising of fixed amounts for the service provided to the patient. The company cost of providing the service is broken down in the following percentages: • x% goes to the other person • y% is for the machine • z% is for the professional (z is greater than 50%). The cost of the machine to the company in relation to the income generated by the company is not as significant as the wages paid. By way of comparison, the cost of the machine is $X per day whereas the cost of an employee is $X per hour. Professional indemnity insurance is held by the company.

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

Reasons for decision: Detailed Reasoning - 1. 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. | Detailed Reasoning - Mainly: Implicit in the word mainly is that more than half (50%) 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. The ordinary or statutory income of an entity may include the personal services income of more than one individual. Regard must be had to the commercial substance of the arrangements between parties in determining who is deriving personal services income. Where there is one set of obligations (different parts of which are integral or common to each other), they are looked together. For example if the entity's obligation is to provide plumbing services, then all the components involved in providing those services are looked at together in determining who mainly provides the services/skills as part of that obligation. Where the income of an entity is generated by more than one individual under separate or distinct contracts/obligations, the income of the entity would include the personal services income of more than one individual. The use of the word mainly in this context does not preclude the use of some materials, tools or plant and equipment in the rendering or provision of personal services. The phrase or would mainly be such a reward if it was your income makes it clear that PSI can be earned by an entity other than the individual whose efforts and skills earn that income. Furthermore, subsection 86-15(2) of the ITAA 1997 clarifies that an entity, including a company, can earn PSI from more than one individual: 86-15(2) A personal services entity is a company, partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals. The company employs two part-time professional employees who conduct the service for the patients. Both the employees perform the same duties. Only one professional is required for each patient. Equipment used in the business is one machine. The cost of using the machine is approximately $X a day. By comparison the cost of an employee is approximately $X an hour. In this case the company is an entity in which different parts of the business, including equipment, are integral or common to each other, namely the knowledge and skills of the professional, the machine and the result interpreting skills of the other person. In calculating the amount to charge on the invoice, the following percentages are used: • x% goes to the other person • y% is for the machine • z% is for the professional (z is greater than 50%). Whilst the machine is essential in the business, the cost of the machine to the company in relation to the income generated by the company is not as significant as the wages paid to the two professionals. As only one professional is required per patient, the work carried out by the director and the other professional is considered to be separate/distinct from the other. As each of the two professionals perform the same duties, and more than half (50%) of the income of the company is income that is a reward for the personal efforts or skills of an individual, the income received by the company includes the PSI of both the professionals. That is the income of the company includes the PSI of two individuals. | Detailed Reasoning - 2. Is the income generated from a business structure?: 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. Any personal services provided that are merely ancillary to these activities are disregarded. | Detailed Reasoning - a. Sale or supply of goods: The company is not in the business of sale or supply of goods. | Detailed Reasoning - b. Granting of right to use property: The company is not in the business of granting the right to use property. | Detailed Reasoning - c. Generation of income from assets.: The reference to the income that is mainly a reward for the personal efforts and skills of a service provider also does not preclude situations where the provision of personal services involves the use of some equipment. For example: • a personal computer of a computer consultant • tradespersons' hand or electrical tools. Where a contact does not require the supply or use of assets, but where plant and equipment are used by the service provider in that activity, the contract would be regarded as one that is for the personal effort, or the skills of the service provider. Income from the effort or the exercise of those skills, in these circumstances, would be regarded as PSI. In this case, whilst the machine is an essential asset in the business, the cost of the machine to the company in relation to the income generated by the company is not as significant as the wages paid to the two professionals. As the company's income is generated mainly as a result of the skills and effort of the two professionals, the income is PSI of the respective professionals. We shall now consider if the income generated by the company is generated from a business structure. | Detailed Reasoning - d. Business structure: Personal services income 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. The services provided by the company require a high level of skill and knowledge as well as substantial training and qualifications. The services provided can predominantly only be provided by qualified professional. The income producing activities of the company are almost entirely dependent on the exercise of the skills of the two professionals. The equipment owned and utilised by the company consists of one machine. The value of the machine is small in proportion to the level of income earned by the professionals. The company has a person who interprets the results however the income that they generate is relatively minimal. The income of the company is predominantly earned from the provision of services by the two professionals. On balance, the income of the company is not from the income yielding structure of the business, but rather it is from rendering personal services of the individual highly skilled professionals. The size of the operation is small. The income is therefore not from a business structure. | Detailed Reasoning - 3. Is income PSI if the individual if engaged as a contractor through an entity they control?: A company is a personal services entity if its ordinary or statutory income includes the PSI of one or more individuals. Thus the company in this case is a PSE as its income includes the PSI of two individual professionals. If one of the part time employee professionals is engaged as a contractor, the company will still continue to invoice the patient for the services performed by the professional. The amount charged for the services performed by the professional will still be more than more than 50% of the total amount charged. Therefore the income of the company will still include the PSI of the individual, even though the individual may be operating as a contractor through another entity which they control, rather than being an employee of the company.