Private ruling: Personal Services Income - Agents Test
Published: February 2012
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the income personal services income? | A1: Yes. | Q2: Whether the proposed arrangement meets the requirements of the unrelated clients test and the 80% rule? | A2: Yes. | Q3: Will the personal services income provisions require income to be attributed to the individual providing the services? | A3: No.

Relevant facts and circumstances: The trust is in the business of writing loans. The trust writes loans to unrelated clients under the licence of a registered mortgage broker (the broker). In effect the trust is acting as an agent for the broker and under the licensing requirements with ASIC, all commissions payable by financial institutions for loans written must be paid to the broker as the licence holder. The broker pays a set percentage of all commissions received to the business writer (the trust). The remaining portion is retained by the broker to cover marketing, administrative support and use of its resources (including business premises as and when required). The trust derives it's income from writing home loans and residential investment property loans. No income sourced from an individual client comprises 80% or greater of the income that is paid to the trust by the broker. The trust receives 100% of its income from upfront and trail commissions received from the broker. The trust uses the services of an individual to carry out all activities on behalf of the broker. The individual is not employed by the broker. The trust conducts activities such as advertising in specifically marketed newspapers, cold calls to accountants, financial planners and solicitors and generating leads through networking and other functions to source business on the principal's behalf. The trust does not have its own premises as it is a mobile lender. However, it will use the office of the broker where office premises are required to finalise loan documents with clients who find it more convenient. No amount is specifically paid by the trust to the broker when the premises of the broker are used as this forms part of the commercial arrangement between the two entities and was agreed to as part of the broker's retention from income derived by the trust through the use of the broker's licence. There is no formal lease between the agent and the company for premises. The agreement between the parties states that the trust has access to premises if required, subject to space being available. The agent is required to book offices if they want to have appointments in the office of the principal. In return for this, the principal retains a percentage of the commissions earned by the agent.

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

Reasons for decision: Summary: The income is the personal services income of the individual. | Detailed Reasoning - Detailed reasoning: 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 an 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 mortgage broking. Based on the information provided, the Commissioner is satisfied that your income from mortgage broking is mainly a reward for the individual's personal efforts or skills and is therefore personal services income. | Summary: Agents Test and unrelated clients test. | Detailed Reasoning - Detailed reasoning: The unrelated clients test as set out in section 87-20 of the ITAA 1997 provides (1) An individual or a personal services entity meets the unrelated clients test in an income year if: (a) during the year, the individual or personal services entity gains or produces income from providing services to two or more entities that are not associates of the individuals or of the personal services entity; and (b) 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. (2) The individual or personal services entity is not treated, for the purpose 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: (1) 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. (2) Subsection 87-15(3) of the ITAA 1997 and section 87-20 apply, in the manner specified in this section, to an individual or personal services entity if: (a) the individual or personal services entity of another entity is an agent of another entity (the principal) but not the principal's employee; and (b) 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 (c) at least 75% of that income is commissions, or fees, based on the agent's performance in providing services to the customer on the principal's behalf; and (d) the agent actively seeks other entities to whom the agent could provide services on the principal's behalf; and (e) the agent does not provide any services to the customers, on the principal's behalf, using premises: (i) that the principal or an associate of the principal owns; and (ii) 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. (3) If the agent is an individual, in applying subsection 87-15(3) of the ITAA 1997 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: (a) the agent gains or produces during the income year; and (b) 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. (4) If the agent is a personal services entity, in applying subsection 87-15(3) of the ITAA 1997 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 form the principal that: (a) the agent gains or produces during the income year; and (b) is for services that the individual or 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. (5) In determining whether, during an income year, the agent meets the unrelated clients test under section 87-20 of the ITAA 1997, any services the agent provided in the income year or an earlier income year or an earlier income year: (a) for which the agent gains or produces, during the income year, personal services income from the principal; and (b) that were provided to a customer on the principals behalf; are treated for the purpose of paragraph 87-20(1)(a) of the ITAA 1997 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. The information provided shows that under the arrangement: § You will act with the authority of the broker § You will receive income from commissions resulting from mortgage broking to the broker's customers. § A large portion of your income will be commissions based on providing services to the broker customers. § You will actively seek customers on behalf of the broker. § No customer will represent more than 80% of the personal services income. § You will provide some services at premises owned by the broker however, your use of those premises is obtained as part of an arrangement with the broker. § You will source business on behalf of the principal through advertising in newspapers, cold calling and through the use of networking and functions 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 relevant income years. | Detailed Reasoning - Detailed reasoning: As you pass the unrelated clients test you will 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.