Private ruling: Unrelated clients test
Published: August 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Does the business pass the unrelated clients test for a personal services business as set out in section 87-20 of the Income Tax Assessment Act 1997 ? | Yes.

Relevant facts and circumstances: You run a business through your family trust. You are the only employee of the business and you derive personal services income. In the 2014 financial year, the business had two work contracts with different companies which were unrelated to each other, the trust or you. Neither contract made up more than 80% of the income of the business for the 2014 financial year. The contracts were verbal agreements and did not involve any written contract or agreement. One contract was obtained via a word of mouth referral from a previous contract and the other was obtained by you responding to a newspaper advertisement. The contracts were not obtained through a labour hire firm. The business obtains its work through word of mouth referrals and making enquires through others in the industry; it does not advertise in newspapers or business directories, for example.

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 section 87-20

Reasons for decision: Summary: Section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997) defines the personal services income (PSI) of an individual as being income which is mainly a reward for that person's personal efforts or skills. A personal services entity is a company, partnership or trust whose ordinary or statutory income includes the PSI of one or more individuals (section 86-15(2) of the ITAA 1997). An individual or personal services entity conducts a personal services business if a personal services business determination is in force or if the individual or entity 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). The unrelated clients test is set out in section 87-20 of the ITAA 1997 and states: (1) An individual or a personal services entity meets the unrelated clients test in an income year if: (a) during the year, the individual or personal services entity gains or produces income from providing services to two or more entities that are not associates of each other, and are not associates of the individual or of the personal services entity; and (b) the services are provided as a direct result of the individual or the personal services entity making offers or invitations (for example, by advertising), to the public at large or to a section of the public, to provide the services. (2) The individual or personal services entity is not treated, for the purposes of paragraph (1)(b), as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity. An entity will meet the unrelated clients test in an income year if the entity derives personal services income from two or more clients which are not associated with each other or with the entity, where those clients are obtained through offers to the public. Making an offer or invitation to the public in general or to a section of the public is an indication by the individual or personal services entity of their willingness to perform services for anyone within a group or class of persons or to any member of the public. The intention of the individual or personal services entity in such activity is to attract or solicit members of the public to enter into agreements for their services. Page 24 of the ATO guide Personal services income for companies, partnerships and trusts (NAT 72510-05.2009) states that there must be a definite connection between the offer to the public and the engagement for the work. Making offers to the public includes advertising in a newspaper or business directory, maintaining a website and word-of-mouth referrals. In your case, you obtained a work contract via a word of mouth referral from a previous contract and you obtained another contract by responding to a newspaper advertisement. Neither contract represented more than 80% of the income of the business for the year. Consequently, we consider that you have demonstrated a willingness to perform services for anyone within a group or class of persons or to any member of the public. Your method of obtaining the contracts is consistent with providing services as a direct result of making offers or invitations to the public at large or to a section of the public. Therefore, you meet the unrelated clients test under section 87-20 of the ITAA 1997 and are considered to be a personal services business.