Entrepreneurs' tax offset and personal services income: company

Is a company that is a personal services entity that is not conducting a personal services business (PSB) entitled to the entrepreneurs' tax offset (ETO) under section 61-505 of the Income Tax Assessment Act 1997 (ITAA 1997) if the provision is otherwise satisfied?

Yes. A company that is a personal services entity that is not conducting a PSB is entitled to the ETO under section 61-505 of the ITAA 1997 if the provision is otherwise satisfied.

The company is not conducting a PSB.

The company's ordinary income includes the personal services income (PSI) of an individual who performs personal services for the company.

The company is a small business entity for the year and its aggregated turnover for the year is less than $75,000.

The company's small business entity turnover is greater than the deductions attributable to that turnover.

Subsection 61-505(1) of the ITAA 1997 states:

You are entitled to a *tax offset for an income year if: (a) you are an individual or a company; and (b) you are a *small business entity for the year; and (c) your *aggregated turnover for the year is less than $75,000; and (d) you have *net small business income for the year.

In the present circumstances the company satisfies paragraphs 61-505(1)(a) to 61-505(1)(c) of the ITAA 1997.

To determine whether the company satisfies paragraph 61-505(1)(d) of the ITAA 1997, it is necessary to consider the meaning of 'net small business income for the year'.

Section 61-525 of the ITAA 1997 provides that an entity's net small business income is the amount by which the entity's small business entity turnover exceeds the entity's deductions attributable to that turnover. Further, small business entity turnover is the total ordinary income that the entity derives in the ordinary course of carrying on a business.

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

Therefore, while the PSI is not included in the assessable income of the company, the provision of personal services by the individual results in the derivation of ordinary income by the company and this is included in the company's small business entity turnover.

Since, in the present circumstances, the company's small business entity turnover is greater than the deductions attributable to that turnover, the company has net small business income for the year and satisfies paragraph 61-505(1)(d) of the ITAA 1997.

Accordingly, the company satisfies all the conditions under subsection 61-505(1) of the ITAA and is entitled to the ETO. Note: subsection 61-505(2) of the ITAA 1997 provides the method of working out the amount of ETO to which the company is entitled. The first step in the calculation is to determine the company's taxable income. As PSI does not form part of the assessable income of the company, unless the company has ordinary or statutory income other than PSI, its taxable income will be nil. If that is the case, the amount of ETO to which the taxpayer is entitled will be nil.