Private ruling: Personal Services Income (PSI)
Published: March 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the income personal services income? | A1: Yes.

Relevant facts and circumstances: The Trust is the sole shareholder of the Group and the Personal Services Entity (PSE). The Group and the PSE have a service entity arrangement. The Group is a facilities and services provider and the PSE is the trading entity. The Group is the leaseholder and provides the majority of the assets used by the PSE through the service entity arrangement. The PSE runs the day to day operations of the business, such as hiring of staff, including the X. The X is the sole practitioner who provides medical services to patients of the PSE. The PSE provides the X with all the specialised assets to perform the work including: • medical chair • x-ray imaging and developing equipment • premises specially designed for radiation health approval • licence to acquire and possess radiation apparatus • specialised medical flooring • specialised plumbing, suction and compressor plant room • medical software • hand instruments and turbines The total assets invested into the PSE amount to just over $300,000, excluding GST. This amount also excludes any consumables, perishables or stock items. The assets are not suitable for domestic purposes. The PSE employs four arm's length employees including one clinic coordinator and three support staff. The clinic coordinator duties include: • attracting new clients • retaining clients • hiring and training staff • bookkeeping • arranging maintenance of equipment • attracting and managing third party business agreements The support staff are highly trained and directly involved in procedures with patients including: • processing radiographs • making impressions • making mouthguards • special trays • study models • bleaching trays • fluoride trays • assisting the X during medical procedures. The PSE has had business agreements with a health fund and a local hospital under the National Partnership Agreement to provide medical services. The PSE began trading during The PSE's income for the income year ending 30 June 20YY is estimated to be approximately less than $500,000.

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

Reasons for decision: Summary: A PSE receives personal services income (PSI) when they have income that is mainly a reward for an individual's personal efforts or skills and not mainly a reward from the use of income producing assets, the sale of goods or a business structure. | Detailed Reasoning - Use of income producing assets: Income which is principally generated by assets the PSE holds is not PSI as it is not paid mainly as a reward for an individual's personal effort. Judgment is required to determine whether the income is mainly the result of the use or supply of assets, or the provision of personal efforts or skill. The following factors are relevant considerations in determining if income is from the supply and use of income-producing assets: • the market value of the supply and use of the asset, compared with the market value of the personal services • the basis on which the contract price has been calculated and the extent to which the contract price relates to the costs borne by you in supplying and using the plant and equipment or other assets in the income-producing activity • the significance or uniqueness of the assets in the income-producing activity • the gross value of the asset in relation to your income from the particular activity • the role the asset plays in generating the income. In your case, we consider the premises, medical and radiograph equipment are substantial assets which are specifically suited to medical services (and are not generally suitable for private purposes). However, based on market rates, the use of the premises, equipment and maintenance of the equipment for the relevant period represents substantially less than 50% of the amount the PSE receives per consultation. We consider the invoice price would be calculated to account for the costs of using the premises and equipment. However, these costs would be significantly less than the cost of the X's personal services. Total assets invested into the PSE were about $300,000 and year one total income is estimated to be approximately $500,000. Based on these amounts, as a percentage of total income, cost of equipment is about 60%. However, this calculation assumes the asset is used in full over one year and does not take into account the estimated useful life of the assets. If the percentage was recalculated based on the decline in value and the cost of using the assets, the result would be substantially less than 50% of total income. In contrast to the example provided in paragraph 81 of Taxation Ruling TR 2001/7 Income tax: the meaning of personal services income , the X is required to have specialised skills and knowledge to operate the equipment effectively and safely. Operating the equipment requires a high degree of skill only possessed by qualified specialists. The use of the equipment is common to medical clinics, but, nevertheless, the analysis of results and procedures performed are dependent on the personal skills and qualifications of the X. Therefore, we have determined that the PSE's income is not generated mainly by the use of income producing assets. | Detailed Reasoning - Income from a 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: • 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 • the extent to which the income is dependent upon a particular individual's own personal skills, efforts or expertise. The PSE employs an X, a clinic co-ordinator and three support staff. The clinic co-ordinator performs administrative functions that are ancillary to the principal work. Although the support staff perform some principal work they are mainly employed to assist the X with procedures. As there is only one practitioner performing the work the income is significantly dependent upon their personal efforts or skills. The PSE's business agreements with a health fund and a local hospital indicate a presence of goodwill. This factor alone is not sufficient to indicate the existence of a business structure. The X and support staff use several items of equipment to perform procedures. Although the equipment is specialised and has a high purchase price, we consider the cost of using and maintaining these assets to be less significant as the cost of the X's personal services. We consider the size of the clinic is relatively small given that there is only one practitioner, one medical chair and three support staff. The PSE's income is significantly dependent on the X's personal skills, efforts and expertise. Although the X requires the support staff to assist him/her with procedures, these staff are not practitioners as they do not earn material fees in their own right. The X is the sole practitioner that is mainly generating the income for the PSE. The example provided in paragraph 91 of TR 2001/7 determined the income of an entity performing earthworks services was earning income through a business structure. The entity had six employees, five of which were plant operators. This meant the entity could generate income without relying on the skills of any one individual. In contrast to this example, the X is the only practitioner and the PSE cannot derive income without the X's services. The example provided in paragraph 118 of TR 2001/7 more closely resembles the PSE's arrangement where it was determined that the medical practitioner's fees were PSI. Weighing up the factors above we have determined the income is not from a business structure. Therefore, as the income is mainly a reward for an individual's personal efforts or skills, the income is PSI.