Private ruling: Personal services income
Published: November 2014
Ruling period: Year ended 30 June 2014.
Date scheme commenced: 1 July 2013.

Ruling: Question and answer: | Does the Company meet the personal services income unrelated clients test? | No.

Relevant facts and circumstances: Individual X is a director of the Company (the Company). During the 2013 income year and part of the 2014 income year Individual X participated in the arrangement with Company Y, in her/his capacity as an individual. Under the Company Y arrangement, Company Y entered into contracts with various entities to provide the services of Individual X. After Company Y went into voluntary administration, Individual X began performing work through the Company. The Company entered into an agreement with Company Z to provide the services of Individual X. Company Z was the Company's only client in the 2014 income year. Individual X had previously been providing services to Company Z through a contract between Company Y and Company Z. Individual X actively markets their capabilities, skills and experience to their network of business contacts. They maintain and regularly update their presence on social networks; and increase their frequency of contacts as they approach the end of a major project. The clients were obtained by Individual X through word of mouth referrals, using these techniques. The clients are not related entities. No personal services business determination (PSBD) was in force for either the 2013 or 2014 income years in respect of any PSI of Individual X.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 2-42. | Income Tax Assessment Act 1997 Section 84-5. | Income Tax Assessment Act 1997 Section 86-15. | Income Tax Assessment Act 1997 Section 87-20. | Income Tax Assessment Act 1997 Section 87-15.

Reasons for decision: Summary: After Company Y went into voluntary administration, Individual X began providing services through the company. The Company took over providing the services of the taxpayer to Company Z. The company' s income from the contract with Company Z would be considered to be mainly a reward for the Individual X personal efforts and skills and would therefore be PSI within the definition of section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997). The Company as the entity that was the party to the contract with the end user Company Z, and which received the payments would be a personal services entity (PSE) on the basis that it received the PSI of one or more individuals (subsection 86-15(2) of the ITAA 1997). The rules in Part 2-42 of the ITAA 1997 do not apply where a PSE is conducting a personal services business (PSB). Section 87-15 of the ITAA 1997 provides that an entity conducts a PSB if it satisfies one of the four PSB tests or has a PSB determination in force relating to an individual whose PSI is included in the entity's income. If 80% or more of an individual's PSI is from one client (and its associates) then the PSI is not from the entity conducting a PSB unless the results test is met or a PSB determination has been made (subsection 87-15(3) of the ITAA 1997). In 2014, X% of the PSI of Individual X that was included in the Company's income was from Company Z. There was no determination in force for the 2014 income year in respect of the PSI of Individual X earned through the Company. You contend that the unrelated clients test is satisfied. It is noted that you also contend that for the purposes of the 80/20 rule, the income for 2014 should be considered as a total amount. However, it is not Individual X who is required to pass one or more of the tests, but the PSE. In this case, both Company Y and the Company are PSEs for the purposes of subsection 86-15(2)) therefore the rules apply to each PSE separately. | Detailed Reasoning - Does the Company satisfy the unrelated clients test in the 2014 income year?: To satisfy the test in section 87-20 of the ITAA 1997 a PSE must have gained or produced income from providing services to two or more entities that are not associates of each other, and are not associates of the individual or of the PSE, and the services must have been provided 'as a direct result of the … PSE making offers or invitations … to the public at large or to a section of the public. This can include advertising or 'any form of solicitation to the public or a section of the public (Taxation Ruling TR 2001/8 Income tax: what is a personal services business at [50] - [51]), but excludes clients obtained through labour hire firms, employment agencies and the like, section 87-20(2) of the ITAA 1997. In the 2014 income year, the Company gained or produced income from one client. Accordingly, the Company does not satisfy the first limb in section 87-20(1), and the unrelated clients test has not been met. However, please refer to the accompanying personal services business determination (PSBD) which considers the application of subsection 87-65(4) of the ITAA 1997 and whether the unrelated clients test was not met due to unusual circumstances.