Issue
Can a company deduct losses from negatively geared rental property against personal services income received by the company, where the personal services income is subject to the Alienation measure contained in Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997).
Decision
No, losses from a negatively geared rental property cannot be offset against personal services income that is subject to the Alienation measure contained in Part 2-42 of the ITAA 1997.
Facts
The company conducts a consultancy business.
The company owns a negatively geared rental property.
The company's income will be derived for the personal services of an individual.
In the past the company has offset the losses from the negatively geared rental property against the other income in the company, including the personal services income of the individual.
The company is not conducting a personal services business.
Reasons for Decision
Personal services income is defined in Section 84-5 of the ITAA 1997 as: 'Your ordinary income or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income).'
The income from a negatively geared rental property is not mainly from the personal efforts or skills of an individual. As such, it would not fall into the definition of personal services income in Section 84-5 of the ITAA 1997.
The income from the consultancy business is mainly a reward for an individual's personal efforts or skills and is therefore personal services income.
Section 86-15 of the ITAA 1997 provides that personal services income that is not from conducting a personal services business or promptly paid as salary and wages, is attributed to the individual who provided the services.
Section 86-20 of the ITAA 1997 allows the amount attributed under Section 86-15 of the ITAA 1997 to be reduced by the deductions to which the entity is entitled.
The alienation of personal services income measure clarifies what deductions can be claimed against affected personal services income and limits some deductions.
To reduce the attributed amount under Section 86-15 of the ITAA 1997 the deduction must be one to which the personal services entity is entitled under Section 86-60 of the ITAA 1997.
Firstly for an amount to be deductible it must relate to the gaining or producing of an individual's personal services income. The losses from a negatively geared rental property is not an amount that relates to the gaining or producing of the personal services income of the individual.
Secondly, the outgoing must be an allowable deduction under another provision of the ITAA 1997, such as the general deduction provision in Section 8-1 of the ITAA 1997.
Thirdly, Section 86-60 of the ITAA 1997 operates to determine if the circumstances that apply to the entity were to apply to the individual, whether a deduction would be allowable under Division 85 of the ITAA 1997. A deduction is only available to the personal services entity if, the individual would have been entitled to deduct that same amount incurred, given the same circumstances as the personal services entity.
Losses generated from non personal services income activities, such as negatively geared rental properties, cannot be deducted from personal services income. This is because Step 1 of the method statement in Section 86-20 of the ITAA 1997 only refers to deductions that relate to the personal services income.
Given that the company is not considered to be conducing a personal services business, it can only deduct those amounts stated in the method statement outlined in Section 86-20 of the ITAA 1997 against the personal services income.
However, the losses from negatively geared rental properties can be offset against any other income the company may have in accordance with Division 36 of the ITAA 1997.