Private ruling: Personal Services Income
Date of advice: 7 April 2017
Published: September 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Does the Trust pass the unrelated clients test for a personal services business as set out in section 87-20 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: When the Trust distributes personal services income to beneficiaries, will they be subject to the personal services income alienation rules? | A2: No

Relevant facts and circumstances: Individual A is a director and shareholder of the Trust. The beneficiaries of the Trust are Individual A and their family. The Trust Deed states that the Trust is able to distribute its income to all the beneficiaries. The Trust has a contract with Company X to provide services from the premises of Company X. The Trust operates a professional practice. Individual A is the practitioner in the practice. Each client is invoiced directly by Individual A and the invoices show the practitioner and also the ABN of the Trust. Individual A is not required to provide the equipment or tools as the Company provides all the necessary equipment at its own expense. Individual A will be liable for any claims or legal action brought against them in relation to the services provided to their clients. The practice has a number of unrelated clients. The practice obtains clients through public listings, word of mouth referrals and walk-ins.

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 Subsection 87-20

Reasons for decision: Summary: Section 84-5 of the 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. A personal services entity is a company, partnership or trust whose ordinary or statutory income includes the personal services income of one or more individuals (subsection 86-15(2) of the ITAA 1997). In this case, the Trust (which operates a professional practice) is a personal services entity as its income includes the personal services income of Individual A. 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). In this case, the Trust does not meet the results test as it is not required to provide the equipment necessary to complete the services provided. 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 (provided that no more than 80% of the income is derived from any one client), 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. ATO guide Personal services income for companies, partnerships and trusts (NAT 72510-11.2014) on page 24 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 this case, the Trust obtains clients via public advertising, word of mouth referral and general public walk-ins. Consequently, it is considered that the practice has demonstrated a willingness to perform services for any member of the public. The method of obtaining clients 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, the Trust meets the unrelated clients test under section 87-20 of the ITAA 1997. It is considered to be a personal services business and not subject to the personal services income alienation rules. The Trust Deed states that it is able to distribute all the income to all its beneficiaries. Individual A is earning personal services income through the Trust which is operating a professional practice. Consequently, it is only the Trust that could possibly be subject to the personal services income alienation rules. However, as explained in Question 1, the Trust meets the unrelated clients test under section 87-20 of the ITAA 1997. The Trust is considered to be a personal services business and not subject to the personal services income alienation rules. When the Trust distributes personal services income to beneficiaries, each distribution will be treated as a normal trust distribution and the beneficiaries will not be subject to the personal services income alienation rules.