Private ruling: Personal Services Income - Special rules for agents
Published: June 2013
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Whether the income is personal services income (PSI)? | A1: Yes. | Q2: Whether the PSE passes the unrelated clients test and the 80% rule through the application of the special rules for agents? | A2: Yes. | Q3: Will the PSI rules apply to attribute the income to the test individual? | A3: No.

Relevant facts and circumstances: The PSE is in the business of writing loans. The test individual writes loans to unrelated clients under the licence of a registered mortgage broker (the Broker), on behalf of the PSE. The PSE is acting as an agent for the Broker and under the licensing requirements with ASIC, all commissions payable by financial institutions for loans written must be paid to the Broker as the licence holder. The Broker pays 70% of all commissions received to the business writer, the PSE. The remaining 30% is covered by the Broker to cover marketing, administrative support and use of its resources (including business premises as and when required). The PSE derives its income from writing home loans and residential investment property loans, each estimated to be between $200,000 and $1,000,000. No income sourced from an individual client comprises 80% or greater of the income that is paid to the PSE by the Broker. The PSE receives 100% of its income from upfront and trail commissions received from the Broker. The test individual is not employed by the Broker. The PSE does not have its own premises as it is a mobile lender. However, it will use the office of the Broker where office premises are required to finalise loan documents with clients who find it more convenient to meet in the office. No amount is specifically paid by the PSE to the Broker for the use of the premises as this forms part of the commercial arrangement between the two entities. The PSE conducts the following activities to source business of behalf of the Broker: · advertisements in local newspapers · cold calls to accountants, financial planners and solicitors · generation of leads through various networks and functions.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 84-5 | Income Tax Assessment Act 1997 - Subsection 87-18(3) | Income Tax Assessment Act 1997 - Section 87-20 | Income Tax Assessment Act 1997 - Section 87-40

Reasons for decision: Summary: The personal services work undertaken by the test individual is mortgage broking services to clients of the PSE as an agent for the Broker. The income received is the personal services income of the PSE as the income is mainly a reward for the test individual's personal efforts or skills. A PSE will meet the unrelated clients test during an income year if: · during the year, the PSE 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 PSE; and · the services are provided as a direct result of the individual or 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. Section 87-40 of the Income Tax Assessment Act 1997 (ITAA 1997) modifies the operation of the 80% rule and unrelated clients test for certain agents. The PSE satisfies the requirements of subsection 87-40(2) given that: · the PSE is an agent of the Broker but not an employee; · the PSE will receive income from the Broker resulting from mortgage broking to the Broker's customers; · at least 75% of the PSE's income will be commissions based on providing services to the Broker's customers; · the PSE will actively seek customers on behalf of the Broker; · no customer will represent more than 80% of the personal services income; and · the PSE will provide some services at premises owned by the Broker; however, the use of those premises is obtained as part of an arrangement entered into at arms length with the Broker. As the PSE meets all the requirements under subsection 87-40(2), the special rules for agents will apply to ensure the following: · for the purposes of the 80% rule the income is treated as if it were PSI from the customer, and not PSI from the Broker. · for the purposes of the unrelated clients test any services are treated as if the agent, and not the Broker, provided them to the customer. Therefore, the PSE passes the unrelated clients test and meets the 80% rule on the basis of the special rules for agents for the relevant income years. Part 2-42 of the ITAA 1997 deals with the alienation of personal services income measure (the alienation measure). If the alienation measure applies to a PSE, the amount of the PSI is included in the assessable income of the individual whose personal efforts or skills generate the income. If: · the PSE does not satisfy the 'results test'; and · the PSE get 80% or more of the personal services income from one source, they will be subject to the alienation measure, unless they have a Personal Services Business Determination (PSBD). As the PSE meets the 80% rule they can self assess whether the PSI rules apply for the relevant income years. As such if the PSE determines that they pass the unrelated clients test they will not be required to attribute the income to the test individual for the relevant income years. Note that the PSE can apply for a PSBD to confirm that they are not within the alienation measure, or if they are not sure whether they are within the PSI rules, or if they are subject to unusual circumstances. If the PSE believe that the alienation measure should not apply to them, they can request a PSBD from the Commissioner.