Private ruling: Personal Services Income - Unrelated Clients Test
Published: May 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the income personal services income? | A2: Yes

Relevant facts and circumstances: An entity (you) have applied for a Private Binding Ruling for the 2011-12, 2012-13, 2013-14 and 2014-15 financial years. You have applied in relation to the personal services income an identified individual (the individual) generates through you providing services. You seek a ruling on whether you meet the requirements of the unrelated clients test as a result of the special rules applying to agents The scheme or arrangement is as follows: · You are the agent of the principal and act with the principal's authority. · You provide services to unrelated clients. · You receive income from the principal for providing services to customers. · At least 75% of your remuneration is commission payable based on your performance in providing services to customers of the principal. · You actively seek new customers on behalf of the principal. · You conduct activities at premises owned or leased by the principal. The use of the premises and other services that the principal supplies are obtained as part of a normal arm's length contractual arrangement. . · No customer to whom you provide services represents more than 80% of your income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 84-5, | Income Tax Assessment Act 1997 Sub-section 87-18(3), | Income Tax Assessment Act 1997 Section 87-20 and | Income Tax Assessment Act 1997 Section 87-40.

Reasons for decision: Detailed Reasoning - Personal Services Income: 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 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. You stated that the personal services work undertaken by the individual is providing services. Based on the information provided, the Commissioner is satisfied that your income from providing services is mainly a reward for the individual's personal efforts or skills and is therefore personal services income. | Detailed Reasoning - Agents test and unrelated clients test: The unrelated clients test as set out in section 87-20 of the ITAA 1997 provides: An individual or a personal services entity meets the unrelated clients test in an income year if: · during the year, the individual or personal services entity gains or produces income from providing services to 2 or more entities that are not associates of each other, and are not associates of the individual or of the personal services entity; and · the services are provided as a direct result of the individual or the personal services entity making offers or invitations (for example, by advertising), to the public at large or to a section of the public, to provide the services. The individual or personal services entity is not treated, for the purposes of paragraph (1)(b), as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity. You will meet the unrelated clients test in an income year if you have personal services income from two or more clients which are not associated with each other or with you, where those clients are obtained through offers to the public. | Detailed Reasoning - Agents test: Section 87-40 of the ITAA 1997 modifies the operation of the 80% rule and unrelated clients test for certain agents. The provisions of the section are: The object of this section is to modify the operation of this Division for agents who bear entrepreneurial risk in the way they provide services. Subsection 87-15(3) and section 87-20 apply, in the manner specified in this section, to an individual or personal services entity if: · the individual or personal services entity is an agent of another entity (the principal) but not the principal's employee; and · the agent receives income from the principal that is for services that the agent provides to other entities (customers) on the principal's behalf; and · at least 75% of that income is commissions, or fees, based on the agent's performance in providing services to the customers on the principal's behalf; and · the agent actively seeks other entities to whom the agent could provide services on the principal's behalf; and · the agent does not provide any services to the customers, on the principal's behalf, using premises: · that the principal or an associate of the principal owns; or · in which the principal or an associate of the principal has a leasehold interest; · unless the agent uses the premises under an arrangement entered into at arm's length. If the agent is an individual, in applying subsection 87-15(3) to the personal services income of the agent during an income year, any part of the agent's personal services income from the principal that: · the agent gains or produces during the income year; and · is for services that the agent provided to a customer on the principal's behalf in the income year or an earlier income year; · is treated as if it were personal services income from the customer, and not personal services income from the principal. · If the agent is a personal services entity, in applying subsection 87-15(3) to an individual's personal services income that is included in the entity's ordinary income or statutory income during an income year, any part of the individual's personal services income from the principal that: · the agent gains or produces during the income year; and · is for services that the individual or the agent provided to a customer on the principal's behalf in the income year or an earlier income year; · is treated as if it were personal services income from the customer, and not personal services income from the principal. · In determining whether, during an income year, the agent meets the unrelated clients test under section 87-20, any services the agent provided in the income year or an earlier income year: · for which the agent gains or produces, during the income year, personal services income from the principal; and · that were provided to a customer on the principal's behalf; · are treated for the purposes of paragraph 87-20(1)(a) as if the agent, and not the principal, provided them to the customer. Agent has its ordinary meaning of acting for or representing another. A common law agent has an authority or capacity to create or affect legal relations between a principal and third parties. Generally speaking, what a person may do himself, the person may do by an agent. | Detailed Reasoning - The information provided shows that under the arrangement:: · You will act with the authority of the principal. · You will receive commission income from providing services to the principal's customers. · At least 75% of your income will be commissions based on providing services to the principal's customers. · You will actively seek customers on behalf of the principal. · No customer will represent more than 80% of the personal services income. · You will provide some services at premises owned or leased by the principal, however your use of those premises is obtained as part of an arm's length arrangement. Therefore subsection 87-40(2) of the ITAA 1997 is satisfied and you will meet the unrelated clients test under section 87-20 of the ITAA 1997 and the 80% rule under subsection 87-15(3) of the ITAA 1997 on the basis of the agents test in the 2011-12, 2012-13, 2013-14 and 2014-15 financial years. | Detailed Reasoning - Attribution: As you pass the unrelated clients test you would not be required by the Personal Services Income provisions to attribute the income to the individual.

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. | Whether the proposed arrangement meets the requirements of the unrelated clients tests and 80% rule?