Private ruling: Personal Services Income
Date of advice: 19 June 2018
Published: August 2018
Ruling period: Year ended 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the income derived by the Company, in respect of providing services using equipment, personal services income of the professional under section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You are a professional. You are an employee for two organisations. Your company, has entered into a VMO Practice Management Agreement with an organisation. The organisation has world class equipment which is operated by professionals. You provide professional advice You receive clients from referrals. After a consultation you may refer clients to the organisation. The agreement you have with the organisation relates to your consultancy work. The organisation provides the use of their facilities to you. Specialist support staff at the organisation perform all of the work needed to operate their equipment. You do not operate the equipment and you are not in the room when the organisations staff are using the equipment. You pay Facility and Practice Management Fees to the organisation.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 393-5 | Income tax Assessment Act 1997 section 393-15

Reasons for decision: Summary: Personal services income is income that is mainly a reward for an individual’s personal efforts or skills (or would be mainly such a reward if it was the income of the individual who did the work). Division 84 of Part 2-42 of the ITAA 1997 sets out the meaning of personal services income. Section 84-5 of the ITAA 1997 provides: (1) Your ordinary income or statutory income, or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income). (2) Only individuals can have personal services income. This section applies whether the income is for doing work or is for producing a result. The fact that the income is payable under a contract does not stop the income being mainly a reward for your personal efforts or skills. Taxation Ruling TR 2001/7 Income tax: the meaning of personal services income (TR 2001/7) explains the meaning of personal services income contained in Division 84 of Part 2-42 of the ITAA 1997. Paragraph 24 and 25 of TR 2001/7 provides clarification in relation to the use of the word ‘mainly’ in subsection 84-5(1) of the ITAA 1997: The use of ‘mainly’ in the definition means that the income referred to needs to be ‘chiefly’, principally’ or ‘primarily’ a reward for the provision of the personal efforts of, or for the exercise of the skills of, an individual. Therefore, the use of tools of trade or plant and equipment does not of itself preclude the income from being personal services income, if they are ancillary to the generation of the income. Implicit in the word ‘mainly’ is that more than half of the relevant amount of ordinary or statutory income is a reward for the personal effort or skills of an individual. The meaning of personal services income is wider than that which might otherwise be the case under the common law, but it does not include income that is mainly: ● from an entity supplying goods or granting a right to use property; ● generated by assets an entity holds; or ● generated by the business structure. | Detailed Reasoning - Use of assets: Income which is principally generated by assets is not personal services income as it is not paid mainly as a reward for an individual’s personal effort or skills. 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. Example 2 in subsection 84-5(1) of the ITAA 1997 provides an example of income from the use of an asset. The underlying assumption for this example was that the main component of the contract was the use of the semi-trailer rather than the personal services that were also provided. 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 the individual or personal services entity 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 the income of the individual or personal services entity from the particular activity; and ● the role the asset plays in generating the income. | Detailed Reasoning - 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. Example 3 in subsection 84-5(1) of the ITAA 1997 provides an illustration of a situation where income is considered to be from a business structure. In determining the distinction between income that is mainly a reward for personal efforts or skills and income from a business structure a number of factors need to be considered, such as: ● 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, and ● the extent to which the income is dependent upon a particular individuals own personal skills, efforts or expertise. You rely on the equipment and facilities belonging to the organisation to carry out your work. The equipment is worth millions of dollars. The Company is required to pay the organisation up to 85% of the gross amount billed to clients for services using the equipment. In addition to billing clients for the use of the equipment, you bill patients for consultations. | Detailed Reasoning - Conclusion: The income of the company is not mainly a reward from the use of assets or a business structure for the purpose of Division 84 of the ITAA 1997; it is mainly a reward for the personal efforts or skills of the professional (i.e. the professional’s personal services income).