Private ruling: Corporate unit trusts and personal service income
Date of advice: 24 May 2016
Published: July 2016
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: The scheme has commenced

Ruling: Q1: Is the Unit Trust a corporate unit trust as defined in section 102J of the Income Tax Assessment Act 1936 ? | A1: No | Q2: Does the alienation of personal services income measure in Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to income derived by the Unit Trust? | A2: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Unit Trust was established by deed dated dd/mm/yyyy between: n X Pty Ltd, and n X Family Pty Ltd as trustee for the X Family Trust. During the relevant years, the units in the Unit Trust have not been listed on the stock exchange, offered to the public, or held by 50 or more persons. On dd/mm/yyyy, the Unit Trust commenced business (the Business). The Unit Trust, in carrying on the Business, derives income from providing services (the relevant services). The Business' engages two primary practitioners, four other technicians, and three part time receptionists. Together with the practitioners and technicians are directly involved in providing the relevant services. Various specialised tools and equipment are extensively used by the practitioners and technicians to provide the relevant services.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 102J | Income Tax Assessment Act 1936 section 102G | Income Tax Assessment Act 1997 Part 2-42

Reasons for decision: Summary: As the Unit Trust is not a 'public unit trust', it is not a 'corporate unit trust' as defined in section 102J of the Income Tax Assessment Act 1936 (ITAA 1936). | Detailed Reasoning - Detailed reasoning: Section 102J of the ITAA 1936 provides that a unit trust is a corporate unit trust in relation to a relevant year of income, where the relevant year of income is the year commencing on 1 July 1983 or a subsequent year of income, if: • the unit trust is an eligible unit trust in relation to the relevant year of income; • the unit trust is a public unit trust in relation to the relevant year of income; and • either of the following conditions is satisfied: • the unit trust is a resident unit trust in relation to the relevant year of income; • the unit trust was a corporate unit trust in relation to a year of income preceding the relevant year of income. Section 102G of the ITAA 1936 provides that, for income tax purposes, a unit trust is a 'public unit trust' in relation to a year of income if at any time during the year of income: (a) any of the units in the unit trust were listed for quotation in the official list of a stock exchange in Australia or elsewhere; (b) any of the units in the unit trust were offered to the public; or (c) the units in the unit trust were held by not fewer than 50 persons. You have advised that during the years ended 30 June 2014 and 30 June 2015, the units in the Unit Trust: • were wholly owned by X Family Pty Ltd as trustee for the X Family Trust, • were not listed on the stock exchange, and • were not offered to the public. As the units in the Unit Trust were not listed on the stock exchange, offered to the public, or held by 50 or more persons, the Unit Trust is not a 'public unit trust' as defined in section 102G of the ITAA 1936. As the Unit Trust is not a 'public unit trust', it is not a 'corporate unit trust' under section 102J of the ITAA 1936. | Summary: The alienation of personal services income measure in Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997) does not apply to income derived by the Unit Trust. | Detailed Reasoning - Detailed reasoning: Part 2-42 of the ITAA 1997 applies to prevent individuals from reducing their tax by alienating their personal services income (PSI) to an associated company, partnership or trust, or by claiming inappropriate 'business' deductions. Taxation Ruling IT 2639 Income tax: personal services income (IT 2639) explains that income from personal services is income that an individual taxpayer earns predominantly as a direct reward for his or her personal efforts by, for example, the provision of services, exercise of skills or the application of labour (paragraph 3). IT 2639 considers personal services income (PSI) in contrast with 'income from a business structure'. Income derived by a firm or practice which has substantial income producing assets, or many employees, or both is more likely to be generated from the income yielding structure of the business rather than from the rendering of personal services (paragraph 7). Paragraph 8 of IT 2639 provides the following factors are relevant in reaching a decision as to whether a taxpayer derives income from rendering personal services: a. The nature of the taxpayer's activities, b. The extent to which the income depends upon the skills and judgment of the individual, c. The extent income producing assets are used to derive income, d. The number of employees and others engaged Paragraph 69 of Taxation Ruling TR 2001/7 Income tax: the meaning of personal services income (TR 2001/7) explains that the distinction between PSI and income from a business structure needs to be made with regard to factors such as: • the number of arm's length employees or others engaged to perform work, • the presence of goodwill, • the extent to which income-producing assets are used to derive the income, • the nature of the activities carried out, • the size of the operation, and • the extent to which the income is dependent upon a particular individual's own personal skills, efforts or expertise. Paragraph 69 of TR 2001/7 provides that the alienation measure in Part 2-42 of the ITAA 1997 does not apply to businesses that have a substantial profit-yielding structure. As detailed in the facts, during the relevant years the Unit Trust derives income from the Business providing services (the relevant services), by way of activities conducted by two primary practitioners, four other technicians, and other administrative staff. Together with the practitioners, the technicians are directly involved in the providing the relevant services. Further, various specialised tools and equipment are extensively used by the practitioners and technicians to provide the relevant services. It is the Commissioner's view that the income of the Unit Trust, from carrying on the Business, is not income generated as a reward for the personal efforts and skills of one or more individual engaged by the Business, but is income generated from the profit-yielding structure of the business. As such, the alienation of personal services income measure in Part 2-42 of the ITAA 1997 does not apply to the Unit Trust.