Private ruling: Personal services income
Date of advice: 20 October 2015
Published: October 2015
Ruling period: Year ended 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Question and answer | Does the receipt of the bonus payments constitute income of a personal services business? | Yes.

Relevant facts and circumstances: You operate a professional practice in your own name. Your practice employs various staff members. You are engaged by numerous unrelated clients in your practice. You receive personal services income in the course or providing your services and at least 75% of this income meets the 'results' test as specified in section 87-15 of the Income Tax Assessment Act 1997 . You are personally engaged as a consultant to another entity (the client) under a written agreement. You perform work for the client both at your business premises and at the client's premises. You are required to provide your own IT equipment and reference material in providing services to the client. You are entitled to bonuses that are subject to you meeting certain performance criteria as described in the agreement you entered into with the client. The bonuses, if met, are invoiced from and paid to your practice. The practice issues a tax invoice to the client for the amount as per the agreement, plus GST.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 84-5 | Income Tax Assessment Act 1997 section 87-15 | Income Tax Assessment Act 1997 section 87-18

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 has a consulting arrangement with another entity. As part of the arrangement, you are entitled to receive bonus payments should you meet certain performance criteria. Consequently, it is evident that the bonus payments are mainly a reward for your personal efforts or skills and are therefore considered to be your personal services income. If you are in receipt of personal services income, you conduct a personal services business if a personal services business determination is in force or if you meet 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). Section 87-18 of the ITAA 1997 provides that you meet the results test in the relevant income year if, in relation to at least 75% of your personal services income for the year: a) the income is for producing a result; and b) you are required to provide the equipment or tools necessary to do the work; and c) you are 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 the results test will be met 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) you provide the equipment and tools, if any, necessary for doing the work; and c) you bear the commercial risks, including liability for defective work. In your case, you state that: a) the work to which the bonus payments relate is performed in order to produce a result as failure to achieve the result would see you denied the payments; b) you are required to provide your own IT equipment and reference material to complete the work; and c) as the bonus payments are received for successfully achieving the performance criteria, you are required to remedy any defects in service at your own cost in order to be eligible to receive the payments. Based on the information provided, we are satisfied that you meet the results test in relation to your personal services income. Therefore, the receipt of the bonus payments constitutes income of a personal services business.