The results test is one of 4 personal services business (PSB) tests that taxpayers earning personal services income (PSI) can use to self-assess as a PSB.
If you pass the results test, your business is a PSB for that income year. The PSI rules don't apply to the income you earn from this PSB.
To pass the results test, you need to meet all 3 of the following conditions for at least 75% of your PSI you earnt:
- You must be paid to produce a specific result.
- You are required to provide equipment or tools (if required).
- You are required to fix mistakes at your own cost.
You may find that some of your business contracts meet the 3 conditions of the test and some don't.
If you're a company, partnership or trust and you have more than one individual generating PSI, you will need to work out whether the results test is passed for each individual. It is possible to have different outcomes for different individuals.
To meet this condition, you must produce a specific result or outcome before being entitled to be paid.
Generally, you are paid to produce a specific result when:
- payment is made after contractual conditions have been fulfilled – for example, only on completion of each job or specific objectives (this can include receiving progress payments and deposits)
- being paid an amount for an agreed number of completed items or activities – for example, a furniture upholstering business that is contracted to a furniture factory and paid a specified amount to complete 100 lounge suites.
Generally, you are not paid to produce a specific result if you are paid:
- based on an hourly or daily rate for the work you perform
- regardless of whether you achieve a specific outcome or reach agreed objectives.
If you're paid on an hourly basis or daily rate for the services you provide, it's unlikely that you will meet the first condition of the results test. This is because payments on an hourly or daily basis are not generally linked to producing a specific result or outcome.
Example: not paid to produce a result
Joseph provides services to a local authority through his company JoCo, which has entered into a contract with the local authority.
Under the terms of the contract, Joseph must work 40 hours per week for the authority and will be paid based on an hourly rate.
At the end of each fortnight, JoCo issues an invoice to the local authority for hours worked by Joseph and receives payment.
The contract does not meet the first condition of the results test because JoCo:
- isn't contracted to complete a specific job
- isn't paid on the condition that the job is completed
- is paid for time worked rather than the results produced.
To meet this condition you must supply any plant, equipment or tools needed to complete the work which produces the result. This includes plant, equipment or tools that your client would ordinarily expect you to provide, or where you have a contractual obligation to provide it.
You will not fail this condition if you have minor use of tools or equipment provided by your client.
If you do not need plant, equipment or tools to perform the work, then this condition will be met.
To meet this condition, you must be liable for the cost of rectifying any defects in your work. You do not need to actually perform the work that fixes the mistake, so long as you are liable for the cost of the defect to be fixed.
A contractual term which states that you are required to fix mistakes at your own cost may indicate that you have fulfilled this condition. However, this condition will only be fulfilled if this term in the contract can actually be enforced by the client should mistakes in your work happen.
You will not meet this condition if you invoice the client for time spent to fix defects in your work, or if you fix mistakes during your usual working times under the contract. This is because you will not have been liable for the cost of fixing mistakes, as in both these situations the client will have paid for the time taken to correct defects.
Example: required to fix mistakes at own cost
Dave is a software specialist who provides services through his company DaveCo. DaveCo has contracted with a large firm. DaveCo's contract doesn't specify whether he is personally responsible for correcting his mistakes.
In practice, Dave invoices for fixing any mistakes he makes. Therefore, DaveCo does not meet the third condition of the results test.End of example
Example: passing the results test
Joe offers his services to the public, installing air conditioning ducts.
The contract price is based on the installation of specific duct work according to a set of plans, and any changes are subject to the variation clauses in the contract.
Joe assumes the risk of not being able to complete the work to specification or for defective work, as he must fix defects at his own cost. He brings the tools he needs to do the work, such as a hammer, tin snips, dolly, hacksaw, electric drill, pop rivet gun and ladder. He also incurs his own expenses for duct tape, glue, pop rivets, nuts, bolts and drill bits.
Joe satisfies the results test because he is contracted to produce a result (installation of ducts), he brings his own tools to do the work, and he is liable for fixing defects.End of example
Example: not passing the results test
A government department enters into a contract with Consultant Co for the services of Louise, an individual who is nominated in the contract.
The terms and conditions of the contract are that Louise:
- is paid an hourly rate and works for a maximum of 8 hours per day
- has her work quality checked by departmental officers
- is provided with an office, stationery and desktop computer, and uses the department's computer system, software and data for carrying out the required tasks.
Louise also uses her personal laptop to assist her in tasks (but isn't required by the department to use it).
If the work performed by Louise is unsatisfactory, the department is entitled to terminate the contract, but the company isn't required under the contract to fix any defects in the work performed. Consultant Co is a personal services entity (PSE) because its income includes the PSI of Louise, the individual who does the work.
Applying the conditions of the results test:
- The income is for doing work – not producing a result – as Consultant Co is entitled to payment for each hour Louise works for the department, with no risk of making a loss as a result of undertaking the work.
- Consultant Co is not required to supply the plant, equipment or tools of trade needed to perform the work, even though Louise uses her personal laptop to assist her.
- The department is entitled to terminate Louise's contract for unsatisfactory work, but Consultant Co doesn't have any liability to fix any faulty work.
All conditions must be satisfied for the results test to be met.
In this example none of the conditions are satisfied, so Consultant Co doesn't pass the results test and the PSI rules apply.End of example