INCOME TAX ASSESSMENT ACT 1997 - SECT 86.20 Offsetting the personal services entity's deductions against personal services income
INCOME TAX ASSESSMENT ACT 1997 - SECT 86.20
Offsetting the personal services entity's deductions against personal services income(1) The amount of your * personal services income included in your assessable income under section 86 - 15 may be reduced (but not below nil) by the amount of certain deductions to which the * personal services entity is entitled.
Note 1: Subdivision 86 - B limits a personal services entity's entitlement to deductions.
Note 2: If the amount of the deductions exceeds the amount of the personal services income, a deduction for the excess is available to you under section 86 - 27. The personal services entity cannot deduct the amount of the excess: see section 86 - 87.
(2) Use this method statement to work out whether, and by how much, the amount is reduced:
Method statement
Step 1. Work out, for the income year, the amount of any deductions (other than * entity maintenance deductions or deductions for amounts of salary or wages paid to you ) to which the * personal services entity is entitled that are deductions relating to your * personal services income.
Step 2. Work out, for the income year, the amount of any * entity maintenance deductions to which the * personal services entity is entitled.
Step 3. Work out the * personal services entity's assessable income for that income year, disregarding any income it receives that is your * personal services income or the personal services income of anyone else.
Step 4. Subtract the amount under step 3 from the amount under step 2.
Note 1: Step 4 ensures that, before entity maintenance deductions can contribute to the reduction, they are first exhausted against any income of the entity that is not personal services income.
Note 2: If the personal services entity receives another individual's personal services income, see section 86 - 25.
Step 5. If the amount under step 4 is greater than zero, the amount of the reduction under subsection (1) is the sum of the amounts under steps 1 and 4.
Step 6 . If the amount under step 4 is not greater than zero, the amount of the reduction under subsection (1) is the amount under step 1.
Example 1: Continuing example 1 in section 84 - 5: Assume these additional facts:
• $120,000 of NewIT's income is Ron's personal services income;
• NewIT has deductions (including superannuation contributions) of $50,000 relating to Ron's personal services income (step 1);
• NewIT has entity maintenance deductions of $8,000 (step 2);
• NewIT has investments that produce income. NewIT's assessable income, disregarding Ron's or anyone else's personal services income, is $20,000 (step 3).
Because the step 4 amount is less than zero ( - $12,000), step 5 does not apply and, under step 6, the amount of the reduction is $50,000. Therefore the amount included in Ron's assessable income is:
Example 2: Assume, as an alternative set of facts, that NewIT's assessable income under step 3 was only $2,000.
The step 4 amount would have been $6,000, and, under step 5, the amount of the reduction would have been $56,000 (adding the amounts under steps 1 and 4). The amount included in Ron's assessable income would then have been:
Note: The personal services entity's deductions that do not relate
to your personal services income and that are not entity maintenance
deductions cannot reduce the amount included in your assessable income under
section 86 - 15.