Private ruling: Assessability of income
Published: October 2014
Ruling period: Year ended 30 June 2014.
Date scheme commenced: 1 July 2013.

Ruling: Question and answer | Is the income you earned personal services income? | No.

Relevant facts and circumstances: A group of tradesmen work together on commercial building contracts. Each tradesman has set up their own family trust. You are one of these family trusts. One of the trusts, Entity X, is the main contracting party for the commercial building contracts, however all tradesmen work equally as a team and split the profits made on the projects. Each of the tradesmen assists in the preparation of quotes submitted for the projects. You submit a weekly invoice to Entity X for your share of the profit made on the project. The amount invoiced by each tradesman's family trust is determined by calculation of the profit made on the work completed each week. Once the profit is calculated, the earnings are split between each tradesman's family trust based on the number of days worked by each tradesman. There is no set daily or hourly rate for the tradesmen, the invoices are calculated based on the profit earned that week. The earnings from the contracts are split fairly equally between each of the tradesmen. No one tradesman earns more than X% of the income.

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

Reasons for decision: Summary: 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 of personal services income is contained in subsection 84-5(1) of the ITAA 1997 which states: 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). 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 ITTA 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 service provider's personal effort or skills. The fact that income is payable under a contract does not stop the income being mainly a reward for a service providers personal efforts or skills (subsection 84-5(4) of the ITAA 1997). Taxation Ruling TR 2001/7: Income tax: the meaning of personal services income (TR 2001/7) considers the meaning of the word 'mainly' and states (in part): 25. Implicit in the word 'mainly' is that more than half of the relevant amount of the ordinary or statutory income is a reward for the personal efforts or skills of an individual. 26. In interpreting Division 84 it is relevant to ask whether the income is mainly a reward for an individual's personal efforts or skills. If it is, then it is personal services income. If it is not, then that particular amount of income is not personal services income, and not within the alienation measure. 27. Whether or not payments are mainly a reward for personal efforts or skills is determined having regard to the commercial substance of the arrangements between the parties. Where the commercial substance of the arrangement is that there is one set of obligations (different components of which are integral or common to each other) they are looked at together. For example, the sale and installation of an article would be looked at as one obligation rather than separate sources of income, where they are integral components of one transaction. Similarly, when you are providing plumbing services all the activities associated with these services are considered to be provided under a single contractual obligation giving rise to one amount of income. In these cases, there is, in substance, the primary obligation and the other components of the contract are ancillary to the primary obligation. Those obligations, looked at as a whole, are the source of the relevant amount of income and are to be considered as a whole to determine whether the income is mainly a reward for the individual's personal efforts or skills. (emphasis added) In your case, the income you earn is derived from the work of a group of tradesmen working on the same contract and all tradesmen contribute relatively equally to the work conducted and the income is split accordingly. Less than half of the relevant income can be assigned as being a reward for the personal efforts or skills of any one of the individuals. Therefore, the income cannot be said to be mainly a reward for an individual's personal efforts or skills, and so the definition of personal services income as set out in subsection 84-5(1) of the ITAA 1997 has not been met. Therefore, the income you earned is not personal services income.