Taxpayer Alert TA 2002/4: Personal Services - Partnership Arrangement
Date of issue: 27 March 2002
Status: Current


Description: Personal Services - Partnership Arrangement | This Taxpayer Alert describes an arrangement whereby a taxpayer who earns personal services income from the provision of professional services enters into a partnership with other unrelated taxpayers who also earn personal services income. The intended effect is to recharacterise the income being earned as income of the partnership so as to enable the taxpayer to split their income with their spouse or a related party. | 1. A taxpayer earning personal services income from the provision of professional services pays an arranger to organise a partnership with other unrelated taxpayers. 2. The taxpayer pays to the arranger an upfront fee and a continuing management fee. 3. The taxpayer renews existing or enters into new contracts for the provision of personal services in the name of the partnership. 4. Tax invoices for services provided are generally in the name of the partnership. 5. The taxpayer directs the service acquirer to make payments either to the taxpayer as the representative of the partnership or to the arranger as agent for the partnership. 6. If the payment for services are made directly to the taxpayer, that taxpayer pays to the arranger the GST in respect of the provision of the services and the continuing management fee. 7. If the payment for services is made directly to the arranger by the service acquirer the arranger will deduct the applicable GST and the continuing management fee. The net amount is generally paid to the taxpayer who provided the services. 8. The taxpayer's income from the partnership is based on the income generated by the taxpayer's personal services rather than a share of the net income of the partnership income. 9. The taxpayer assigns up to 49% of their alledged interest in the partnership to their spouse or a related party. | 1. A taxpayer earning personal services income from the provision of professional services pays an arranger to organise a partnership with other unrelated taxpayers. 2. The taxpayer pays to the arranger an upfront fee and a continuing management fee. 3. The taxpayer renews existing or enters into new contracts for the provision of personal services in the name of the partnership. 4. Tax invoices for services provided are generally in the name of the partnership. 5. The taxpayer directs the service acquirer to make payments either to the taxpayer as the representative of the partnership or to the arranger as agent for the partnership. 6. If the payment for services are made directly to the taxpayer, that taxpayer pays to the arranger the GST in respect of the provision of the services and the continuing management fee. 7. If the payment for services is made directly to the arranger by the service acquirer the arranger will deduct the applicable GST and the continuing management fee. The net amount is generally paid to the taxpayer who provided the services. 8. The taxpayer's income from the partnership is based on the income generated by the taxpayer's personal services rather than a share of the net income of the partnership income. 9. The taxpayer assigns up to 49% of their alledged interest in the partnership to their spouse or a related party. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: (a) The validity of the partnership. For example: there does not appear to be an objective intention to carry on a business in common with a view to profit with the other partners. (b) Whether a business providing professional services is being carried on through a partnership. (c) Whether the arrangement circumvents the provisions of Part 2-42 of the ITAA 1997 which deals with taxpayers deriving personal services income. (d) The application of Part IVA of the ITAA 1936: i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. in the dominant purpose of entering into the arrangement is to obtain the tax advantages of income splitting and access to an increased range of deductions. | (a) The validity of the partnership. For example: there does not appear to be an objective intention to carry on a business in common with a view to profit with the other partners. (b) Whether a business providing professional services is being carried on through a partnership. (c) Whether the arrangement circumvents the provisions of Part 2-42 of the ITAA 1997 which deals with taxpayers deriving personal services income. (d) The application of Part IVA of the ITAA 1936: i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. in the dominant purpose of entering into the arrangement is to obtain the tax advantages of income splitting and access to an increased range of deductions. | i. the arrangement seems artificial and lacks an ordinary business purpose in its design and execution; and ii. in the dominant purpose of entering into the arrangement is to obtain the tax advantages of income splitting and access to an increased range of deductions.





Related documents: TD 2002/D8 | TD 2002/24. | PS 2001/15 - Taxpayer Alerts | Section 8-1 of the ITAA 1997 | Part 2-42 of the ITAA 1997 | Part IVA of the ITAA 1936