Private ruling: Personal services income
Date of advice: 2 February 2016
Published: March 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Question and answer | Will the company be subject to the personal services income alienation rules? | No.

Relevant facts and circumstances: You are a professional who is currently operating as a sole trader. You intend to conduct your business through a company structure. You maintain an office suite where you hold consultations with a number of unrelated clients each year. You employ a part-time secretary. You have an arrangement with another entity to perform some of your services using their facilities. You are engaged by clients to provide a specific result. Should there be an issue with the services you perform, you are required to rectify the issue. You hold professional indemnity insurance.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 84-5 | Income Tax Assessment Act 1997 Subsection 86-15(2) | Income Tax Assessment Act 1997 Section 87-15 | Income Tax Assessment Act 1997 Subsection 87-18(3)

Reasons for decision: Summary: Section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997) defines the personal services income of an individual as being income which is mainly a reward for that person's personal efforts or skills. In your case, you are a professional who provides services to clients and it is evident that the income you derive is mainly a reward for your personal efforts or skills and is therefore personal services income. A personal services entity is a company, partnership or trust whose ordinary or statutory income includes the personal services income of one or more individuals (subsection 86-15(2) of the ITAA 1997). A personal services entity will be subject to the personal services income alienation rules unless it conducts a personal services business. Under the alienation rules, the personal services income received by a personal services entity is attributed to the individual or individuals who performed the work. In your case, you intend to conduct your business through a company structure. Therefore, the company will be a personal services entity as its income will include your personal services income. A personal services entity or individual conducts a personal services business if a personal services business determination is in force or if the entity or individual meets at least one of the four personal services business tests in the relevant income year. The four tests are the results test, unrelated clients test, employment test and business premises test (section 87-15 of the ITAA 1997). Should the results test be passed, the personal services income alienation rules will not apply and the other tests will not have to be considered. Subsection 87-18(3) of the ITAA 1997 provides that a personal services entity meets the results test in the relevant income year if, in relation to at least X% of the personal services income of one or more individuals that is included in the entity's income for the year: a) the income is for producing a result; and b) the personal services entity is required to provide the equipment or tools necessary to do the work; and c) the personal services entity is, or would be, liable for the cost of rectifying any defects in the work performed. Paragraph 34 of Taxation Ruling TR 2001/8 Income tax: what is a personal services business states that a personal services entity or individual will meet the results test where: a) the contract is to produce a specified outcome or result and payment is based on performance of the contract (i.e., for producing the outcome or result); b) the entity or individual provides the equipment and tools, if any, necessary for doing the work; and c) the entity or individual bears the commercial risks, including liability for defective work. In your case, once the company structure is in place, it is evident that in relation to at least X% of the personal services income you derive: a) the income will be for producing a result; and b) the company will be required to provide the equipment or tools necessary to do the work; and c) the company will be liable for the cost of rectifying any defects in the work performed. Therefore, the company will pass the results test and will be conducting a personal services business. It will not be subject to the personal services income alienation rules.