Decision impact statement
 FCA 1867
(2007) 165 FCR 57
2007 ATC 5326
69 ATR 433
Venue: Federal Court of Australia
Venue Reference No: WAD 174 & 175
Judge Name: Allsop J
Judgment date: 5 December 2007
Appeals on foot:
Impacted AdviceRelevant Rulings/Determinations:
alienation of personal services income
the results test
|This document is not a public ruling, but provides a statement of the Commissioner's position in relation to the decision and how the law will be administered as a consequence of the decision. Any proposals for changes in the law are matters for government and it is not appropriate for the Commissioner to comment.|
These cases were funded to test the application of 'the results test' [one of the four personal services business tests in the personal services income legislation] and whether artificial arrangements operated to defeat the legislation for individuals working in employee-like circumstances.
Brief summary of facts
The two cases were heard together and concerned two unrelated engineers who were engaged by personal services entities ("the Entities"). In the first case the personal services entity was a company, of which the first engineer was the sole director and shareholder and in the second case the personal services entity was a trust, of which the second engineer was the controller and a beneficiary. The Entities both operated as independent contractors providing the engineering services of the engineers. The Entities applied for Personal Services Business Determinations which were refused by the Commissioner.
The Entities separately contracted with a labour hire firm to provide each engineer's services to a joint venture of construction companies which was responsible for construction costing billions of dollars ("the Joint Venture"). The labour hire firm contracted with the Joint Venture to provide engineering and other services. The Joint Venture paid the labour hire firm for the services of the engineers and the labour hire firm then paid the Entities in accordance with their contracts with the labour hire firm. The engineers provided services only to the Joint Venture in the relevant period. The Joint Venture was not bound by the contracts between the labour hire firm and the Entities.
The use of a labour hire firm was standard practice for the relevant industry in Western Australia.
Prior to the relevant period both the Entities stopped using one labour hire firm and contracted with another labour hire firm to enable the Entities to be engaged under new contracts. The labour hire firm had drafted the terms of the contracts in an attempt to legitimately characterise the terms of engagement so that the results test was satisfied. The work of the engineers did not change after the engagement of the Entities by a different labour hire firm.
The Entities' contracts with the new labour hire firm provided that payment for work done by the engineers was calculated at a 'unit price' up to a maximum sum per fortnight which appeared to reflect a payment for results. The Joint Venture made fortnightly payments to the labour hire firm based on the timesheets of the engineers and a standard 45 hour working week.
The engineers worked as part of an integrated team with other staff and contract engineers to produce documents which were necessary for construction of the relevant infrastructure for the Joint Venture.
The contracts with the labour hire firm purported to require the entities to provide a laptop for the engineers. However the joint venture provided all equipment, office space, computers and software and essential templates for the work of the engineers.
The work of the engineers was performed for and overseen by the Joint Venture. Their work was done in consultation with peers and supervisors. Neither of the engineers maintained professional indemnity insurance.
Issues decided by the court or tribunal
Justice Allsop dismissed the appeals against the refusal of the Commissioner to grant Personal Services Business Determinations under s87-65 of ITAA97 to the Entities.
His Honour relied on the Ralph Report, [A Tax System Redesigned, July 1999] as a seminal report in the development of revenue legislation in Australia to assist in understanding the mischief, underlying purposes and conceptions to which Part 2-42 was directed. He also relied on the Explanatory Memorandum to the New Business Tax System (Alienation of Personal Services Income) Bill 2000, and the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 6) 2001. His Honour stated that it was not necessary to identify any ambiguity to examine the context of the legislation.
His Honour concluded that the Guide and the operative provisions of Part 2-42 make clear that the legislation is aimed at 'employee-like' and 'employment-like' arrangements [para 34]. The 2001 Explanatory Memorandum and s84-10 contemplate that the application of Part 2-42 to an individual does not mean that the individual is an employee and not an independent contractor, nor does it mean that the contract between the labour hire firm and the engineers were shams. He also concluded that not all of the common law criteria for characterising an independent contractor must be satisfied to satisfy the results test, only the three specific results test criteria [para 36-37].
In assessing each of the three results tests, His Honour concluded that it is the substance and not the form of the circumstances surrounding the relationship of the individual whose exertions produce the personal services income and the party who acquires or receives the services which is of primary importance. The contract between the engineers and the labour hire firm assists in, but does not determine, this enquiry [para 50-52].
In relation to the application of the results tests to the Entities His Honour held:
- s 87-18(3)(a) was not satisfied. The income of the engineers was not for producing a result but to work as part of a team [110, 157]. The reformulation of the relevant contracts in terms of deliverables did not change the substance of the work required into the production of results .
- s 87-18(3)(b) was not satisfied. The engineers were not required by the Joint Venture to provide any plant and equipment or tools of trade, everything necessary was provided by the Joint Venture [118, 161].
- s 87-18(3)(c) was satisfied. Although the team work and incremental review of work by the team meant that it was unlikely that an individual could be held to account nevertheless as independent contractors if defective work of one of the engineers was identified he may have been criticised and asked to rectify it. His Honour held this was sufficient to satisfy the provision [para 105, 162].
Tax Office view of Decision
The decision is in accordance with the ATO view of the legislation expressed in TR 2001/8
Implications on current Public Rulings & Determinations
Implications on Law Administration Practice Statements