Entrepreneurs' tax offset and personal services income - partnership

Is the partner in a partnership that is a personal services entity that is not conducting a personal services business (PSB), entitled to the entrepreneurs' tax offset (ETO) under section 61-510 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of personal services income (PSI) that is attributed to the partner?

Yes. The partner in a partnership that is a personal services entity that is not conducting a PSB, is entitled to the ETO in respect of PSI that is attributed to the partner since all the conditions under subsection 61-510(1) of the ITAA 1997 are satisfied.

The partnership is not conducting a PSB.

The partnership's ordinary income is the PSI of the partner.

The partnership is an simplified tax system (STS) taxpayer for the year and its STS group turnover for the year is less than $75,000.

The partnership has net STS income for the year.

Subsection 61-510(1) of the ITAA 1997 states:

You are entitled to a *tax offset for an income year if: (a) you are a partner in a partnership during the year; and (b) the partnership is an *STS taxpayer for the year; and (c) the partnership's *STS group turnover for the year is less than $75,000; and (d) the partnership has *net STS income for the year; and (e) your assessable income for the year includes a share (your net STS income share) of that net STS income. * denotes a term defined in section 995-1 of the ITAA 1997

In the present circumstances the partner satisfies paragraphs 61-510(1)(a) to 61-510(1)(d) of the ITAA 1997.

To satisfy paragraph 61-510(1)(e) of the ITAA 1997 the partner's assessable income must include a share of the partnership's net STS income.

Through the application of sections 86-15 and 86-20 of the ITAA 1997 the assessable income of the partner who performs the personal services includes the amount of ordinary income of the partnership that is the PSI of the partner, reduced by certain deductions to which the partnership is entitled. Pursuant to section 86-30 of the ITAA 1997, this amount does not form part of the assessable income of the partnership.

However, section 61-525 of the ITAA 1997 provides that an entity's net STS income is the amount of STS annual turnover less any deductions attributable to that turnover. Further, STS annual turnover is the sum of the value of business supplies made during the year.

The provision of personal services by the partner for the partnership is a business supply made by the partnership and therefore the value of that supply, being the amount of PSI, is included in the partnership's STS annual turnover. However, the amount of PSI to be attributed to the partner is not a deduction attributable to that turnover in calculating the partnership's net STS income.

Therefore, while the PSI is not included in the assessable income of the partnership, it still forms part of the partnership's net STS income. As such, the amount of ordinary income of the partnership that is included in the partner's assessable income under section 86-15 of the ITAA 1997 is a share of the net STS income of the partnership for the purposes of paragraph 61-510(1)(e) of the ITAA 1997.

Accordingly, the partner satisfies all the conditions under subsection 61-510(1) of the ITAA 1997 and is therefore entitled to the ETO.