Private ruling: Personal services income
Published: December 2014
Ruling period: Year ending 30 June 2015.
Date scheme commenced: 1 July 2014.

Ruling: Question and answer | Is the income you receive in relation to your product and related services personal services income as defined in section 84-5 of the Income Tax Assessment Act 1997 ? | No.

Relevant facts and circumstances: You have developed a product which you sell to customers. You developed the product "in-house" with the intention of licencing it for use by customers by granting exclusive use of the product for a set period of time, with the ownership rights of the product to remain with you. Each of the contracts with your customers for the licencing of the product is expected to include a requirement for a number of modifications or adjustments to the product and for support and training to be provided to the customers. The support, training and installation activities are carried out by one individual.

Relevant legislative provisions: Income Tax Assessment Act 1997 Divisions 84 to 87

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). The reference to the income that is mainly a reward for the personal efforts or skills of a service provider requires a conclusion as to the substance of contractual arrangements between the relevant parties to those contracts. The Macquarie Dictionary (Second Revision) defines "mainly" as: chiefly; principally; for the most part Whether the provision of the personal efforts or skills of a service provider to a service acquirer is the chief or the principal component of a contract will depend on the terms and conditions of that contract. Income from personal services is to be distinguished from income that is mainly: • for the supply of goods • for the granting of a right to use property • for the use of assets in the income producing activities and where those assets generate the income for the entity. In your case, you have developed a product which you will licence to customers by granting exclusive use of the product for a set period of time, and support and training will be provided to the customers in connection with the installation of the product. Although one individual will carry out the support, training and installation of the product, and that may be their own effort and skill, it is considered that the income is mainly for the supply of goods, being the product and associated support, or alternatively for the granting of the right to use the product. The income earned is not mainly a reward for the individual's personal effort and skill. Therefore, the income received in relation to your product and related services is not personal services income as defined in section 84-5 of the ITAA 1997.