Concept of Income from Exertion

Running head: TAXATION LAW
Taxation Law
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2TAXATION LAW
Table of Contents
Topic: With the introduction of Personal Service Income Regime, is the concept of “income
from exertion” now redundant?.................................................................................................3
Introduction:...............................................................................................................................3
Operation of the New Personal Service Income:.......................................................................4
Personal Services Income:.........................................................................................................4
Guidance of Commissioner in personal service income:...........................................................5
Recognizing other contributions to the income:........................................................................6
Post application review:.............................................................................................................7
Recognizing other contributions to the income:........................................................................9
Conclusion:..............................................................................................................................11
Reference List:.........................................................................................................................12

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Topic: With the introduction of Personal Service Income Regime, is the concept of
“income from exertion” now redundant?
Introduction:
In Australia, the regime relating to the tax of personal service income has agonized
from being difficult, non-clear and undefined which ultimately results in inadequate
compliance with the rules. Personal service income can be defined as the reward for the
results of an individual personal efforts (Travers 2014). Before the introduction of the
personal service income regime the system of taxation was effected by several inequalities. It
was very much possible for an individual taxpayer to lower their liability of taxation by
isolating their personal service income to the related companies or the lawful entity and by
claiming incorrect deductions. According to the review it was important opinion that the
income generated from the personal exertion of a person cannot be withdrawn.
Before introducing the rule of personal service income the main concern that
originated from the use of interposed entity namely the company, partnership or the trust to
generate the personal service income. This comprised of the capability of the taxpayer in
deducting the wide range of deductions (Aldridge et al. 2015). The major concerns also
included the ability of taxpayer in using the entity as the interposed entity in order to cap off
the rate of taxation and defer the generation of income by the company till the time when the
associated individuals have reduced taxation rate. Such attributes bought forward the
concerns that there is a need to reduce the significant amount of attack that is made on the
income base. The capability of the taxpayers in alienating the earnings reflected the necessity
of removing the aspects of the horizontal inequality in the taxation system.

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Operation of the New Personal Service Income:
According to the legislation of the personal service income it evidently makes it clear
that an individual that falls inside the personal service income rules shall be restricted to
deductions that are available to a person (Frey and Osborne 2017). Concerning the alienation
of earnings the explanatory memorandum states that beside the current general anti-
avoidance rules of “Part IVA of the ITAA 1936” there is no form of particular rules that
would address the adverse revenue implications that may happen upon the occurrence of
alienation. In the explanation memorandum provided by the court of law the anti-alienation
measures of the new rules where the personal service income is credited to the person that are
generating income would be able to cut down the need of applying the part IVA.
According to Becker, Reimer and Rust (2015) this appears to suggest that the new
personal service income measures are adequately considered as the comprehensive to
contract the alienation of the earnings and the dependence on the part IV would be
significantly lowered with the introduction of the personal service income rules. An
important consideration of the statement is that personal service income where not applicable
then Part IV A can be considered.
Personal Services Income:
To fall inside the “Part 2-42 of the ITAA 1997”, personal service income should be
derived. According to the definition provided under the section 84-5 it defines the personal
service income as the income which is gained largely as the reward for the personal efforts or
the skills that are employed by an individual. Income that is generated by the company from
the skills or private efforts of a person would be classified as the personal service income. In
respect of this definition the income that is ancillary to an organization supply goods or
providing the right of using the property or income that is largely generated by the asset that
is held by the entity is not classified as the personal service income (Johnson et al. 2015).

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This is because this income is not held as the reward for the individual personal efforts.
Instead, this income is usually paid as the consideration relating to the provision of the goods
and services from the usage of an asset.
The reference that is made in the “subsection 84-5 (1)” to income is largely held as
reward for an individual’s personal skill or effort required in respect of the substance of
contract among the relative parties (Lizarazo et al. 2017). Whether the endowment relating to
the private effort or skills of a person to the service acquirer is held as the principal
component of the contract it is dependent on the terms of the contract and conditions.
Guidance of Commissioner in personal service income:
Before making an introduction to the new legislation of personal service income, the
commissioner used to remain dependent on the number of Australian taxation office rulings
(Evers, Miller and Spengel 2015). The commissioner also relied on the Taxation Ruling of IT
2121 that was concerned with the family companies and trusts in respect to the earnings from
the personal exertion.
In conversing the relevant factors for determining whether a sum is a personal service
income IT 2639 acknowledged that introducing the personal service income was considered
as the question of fact and degree that needs to be determined in each of the circumstances of
each cases (Jacob 2018). The ruling also identifies that an individual may generate income
from numerous sources and should only be the earnings that originates from the source of
person service of taxpayer which should be held as personal service income. While other
incomes generated by the taxpayer must be treated and apportion distinctively. The ruling
additionally explains that if the practice of trust or company is at least having several non-
principal practitioners in the form of principal practitioners then in such situation the income

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is perceived to be derived from the business structures. As a result such income would not be
classified as the personal service income.
Recognizing other contributions to the income:
Given the personal service income facilitate the separation of income to the income
that is received from the private service or that is obtained from the other sources then it
would be considered necessary credit those income entirely from the personal exertion to the
person that is rendering the service. The other income may be reserved in the entity or may be
held for taxation and may be distributed to the individuals other than the persons that are
rendering the service (Markle 2016).
In spite of identifying that the some contributions that are made to the personal
service income might originate from the use of the assets, the personal service income rules
that is stated in the part 2-42 of the ITAA 1997 does not make any form of adjustment for the
existence of the other contributions. This would be considered as the natural consequences of
accepting the definition of the personal service income being largely for the personal exertion
of a person (Rendall 2017). Nevertheless, it might be possible that the based on the nature of
the contractual arrangements to separate the income that has originated from the items apart
from the private service of a person.
According to the paragraph 27 of the Taxation ruling of TR 2001/7 a reference to the
commercial substance of the arrangement is determined given only supply is made where it
explains that whether or not the payments that are largely held as reward for private effort or
skill it also contains the profitable material of the preparations among the parties. The
profitable constituent is such that there is only a single set of obligations that are looked
together (Ciconte et al. 2016). On noting that if only a single supply to the personal service is
made in compliance with the sole profitable arrangements then the entire amount of income

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that is derived from that activity is most likely to be held as personal service income.
Nevertheless, when there is a distinct obligations that exists then the income should be
segregated to the components based on the suggestion of paragraph 28 of the Taxation Ruling
TR 2001/7.
With the introduction of the personal service income separating the different streams
of income is considered easy where the contractual documents treats the supplies as distinct
and the invoices presents a distinct values for different services (Jones and Rhoades-Catanach
2015). Nevertheless, where there is no contractual separation of the supplies with the invoices
does not showing the separating value for different supplies that it may turn out to be very
difficult in maintaining the argument that there is a separate supplies. According to the
paragraph 29 of the “Taxation Ruling of TR 2001/17” a support might be provided for the
distinct rewards relating to the use of the assets or other items that are even though the
contractual documents does not recognizes the distinct supplies.
To remain dependent upon the paragraph 29 it is necessary to for an entity that are
providing the personal service to credit values to these contributions (Miller and Oats 2016).
At least it must be done in the process of invoicing even though no separate supplies are
presented in the contractual arrangements. The capability of rewarding non-personal services
contributions to the overall income would lend a support to the argument that this component
is not a subject of accreditation in compliance with the “part 2-42 of the ITAA 1997”. More
amount of substantial support for such approach is required to be generated where the
contributions are held to be significant and easily identifiable.
Post application review:
In the year of October 2009, the taxation board provided a review to the assistant
treasurer regarding the post-application of the alienation of the rules of personal service

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income. The board of taxation considered whether the guidelines has been effective in
attaining its goals of the greater equity and neutrality in imposing tax on the income from the
personal services (Pope 2016). The chief issue before the taxation board was to establish that
whether the legislation is creating the proposed effect and whether the introduction of the
personal service income can be improved. The findings from the review report of the board of
taxation states that the introduction of personal service income rules has went an extent in
attaining the objective of enhancing the integrity and equity in the taxation system.
Nevertheless, the degree of enhancement in the view of taxation board was considered to be
insufficient.
The difficulty in implementing the rules and related uncertainty along with the
restricted degree of compliance activity by the Australian taxation office has reduced the
efficiency in attaining the objective of the policy (Keen and Mullins 2017). The board of
taxation has recognised that the introducing the personal service income rules was to lower
the dependence of the commissioner on Part IVA at the time of dealing with the tax
avoidance through the introduction of personal service income.
The view of the commissioner stated that the income from the personal exertion will
be subjected to income tax irrespective of any of the interposed entities through which the
income is routed (Du Preez 2016). The personal service income legislation objective is to
prohibit the taxpayers from splitting their income from personal exertion with any other
individuals namely companies, trust and spouses so that the tax liabilities can be reduced.
With the introduction of the personal service income rules the net amount of the
personal service income is levied based on the individual level. Deduction is also largely
restricted to those that can be claimed by the employees (Zeff 2016). The methods of income
splitting is considered as one of the most extensive methods that are used by the Australians

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to lower the liability to taxation. The commissioner stated that to move forward it is
necessary to meet the objective of the personal service income. To meet the purpose of
personal service income, earnings must be taxed to the individuals that are generating
income.
The threshold limit requirement must be that only the personal service income is
attributed in this manner (Oats, Miller and Mulligan 2017). The discussion of the definition
relating to the personal service income provides that there are other recognizable contributors
that generate income, a correct return must be distributed to those contributions. The
commissioner in its view stated that the gross income must be separated in order to determine
the residual pure personal service income. There may be difficulty in valuing contributions
under the personal exertion that are made by the other business assets in relevant cases. The
introduction of the personal service income the income from personal exertion can be stated
that it has become redundant.
Recognizing other contributions to the income:
If the introduction of the personal service income provided the separation of the
income that is derived from the personal services and income that are received from the other
sources, then it is only required to credit the income entirely from the personal exertion to the
individual that are rendering the service. There are other incomes that may be preserved in
the entity and are taxed inside the entity or distributed among the persons other than the
individuals that are rendering the services (Fleurbaey and Maniquet 2015). In spite of the
recognition that some of the contributions that are made to the personal service income it may
come into the existence from the existence of the other contributions. This is considered as
the natural significance of accepting the definition of the personal service income as chiefly
from the personal exertion of a person. Nevertheless it might be probable, based on the nature

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of the contractual arrangements to separate the income that originates from the item other
than the personal service of the individual.
With the introduction of the personal service income the separation of the different
streams of income have become easier where the contractual documents considers the
supplies as the different and pertinent invoices reflects that the separate amounts for the
different services. However, on the event of no contractual parting of the supplies the
invoices does not shows the separate value for the different supplies result in more difficulty
in maintaining the argument that there is a separate supplies (Sikka 2017). The original
contribution relating to the income from the personal exertion to the personal service income
could be assessed based on the value of the services rendered. Alternatively, the contribution
of the personal exertion can be valued with the use of benchmark remuneration.
According to the review conducted by the business taxation, it stated that with the
introduction of the personal service income has enabled individuals to reduce the instances of
taxation by splitting the income (Fleurbaey and Maniquet 2015). The use of personal service
income has enabled the entities to get deductions that might not be possible to a person as the
employee along with the opportunity of increasing the tax deductible superannuation
contributions that is made relating to the test of individual spouse.
The most probable tax benefits that are available under the environment of personal
service income is when an individual uses an entity to obtain the personal service income
substantially gets lower amount of income than they would have ever received if they offer
the service based on their individual capacity as the employee or contractor (Du Preez 2016).
The challenge that remains to the activities is that as the personal service business reflects no
form of tax benefit derived by the individual taxpayer there is no form of diversion of

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personal service income as well. On the event of no tax benefits, then the part IV A is not
applied.
It can be stated that with the introduction of the personal service income the income
from personal exertion has somewhat become redundant. The personal service income is
generally viewed as the reward for the income that is derived from the private efforts or
skills. The personal service income is largely related to the supplies of services instead of
being associated with the supply of goods (Jones and Rhoades-Catanach 2015). The personal
service income generally remains dependent on the skills and judgement of the taxpayers.
The personal service income is most likely to originate when there is minimum amounts of
assets and lesser number of employees.
Conclusion:
On a conclusive note it can be stated with the introduction of the personal service
income the income from the personal exertion has somewhat become redundant. The purpose
of the personal service income was to impose tax on the personal service income that are
received in the hands of the individuals that are deriving income and are partially content
with the rules of the personal service income.
With the combination of value contribution on the personal exertion using the mode
of benchmarking remuneration, a pure return to the personal services can be determined.
However, in the non-presence of legislative changes to the present rules of the personal
service income, an effort has been demonstrated to distribute the return from the personal
exertion to the persons that considered that it may significantly restrict the probable
application of the part IVA.

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for Business, 90(6), pp.287-295.
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Kluwer Law International.
Ciconte, W., Donohoe, M., Lisowsky, P. and Mayberry, M., 2016. Predictable uncertainty:
The relation between unrecognized tax benefits and future income tax cash outflows.
Du Preez, H., 2016. A construction of the fundamental principles of taxation (Doctoral
dissertation, University of Pretoria).
Evers, L., Miller, H. and Spengel, C., 2015. Intellectual property box regimes: effective tax
rates and tax policy considerations. International Tax and Public Finance, 22(3), pp.502-530.
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fairness (No. 2015005). Université catholique de Louvain, Center for Operations Research
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computerisation?. Technological Forecasting and Social Change, 114, pp.254-280.
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Tributarios, A., Myrén, S.J. and Lindahl, A., 2015. Income tax for professional athletes and
artists-a cross border story.

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Investment Planning. McGraw-Hill Higher Education.
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