Edited version of private advice

Authorisation Number: 1052253007779

Date of advice: 18 June 2024

Ruling

Subject: Personal services income - results test

Question

Is the income you receive personal services income (PSI) under section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Do you meet the results test under section 87-18 of the ITAA 1997 for the relevant income year?

Answer

No.

Question 3

Did you conduct a personal services business in the relevant income year?

Answer

No.

This ruling applies for the following period:

Year Ending 30 June 20XX

The scheme commenced on:

1 February 20XX

Relevant facts and circumstances

You are an Australian Private Company.

In the relevant income year, the company provided psychological services through one contract with Entity A.

Person A is the director of the company and an employee.

You commenced providing your psychology services to Entity A on 1 February 20XX.

Person B was hired as the second employee required under the contract.

The Contract completion date is XX month 20XX.

You are contracted to provide services Monday to Friday and be available from 8:00am to 5:00pm.

You report to Person C, who is responsible for confirming that services are delivered as per your contract, before Entity A will release funds for your payment.

You have public liability insurance and professional indemnity with a specified insurance company.

You do not have exclusive use of office space. You have been provided an office space for the company's use within a centre operated by Entity A.

The centre has other programs, conducted by unrelated parties.

You are required to furnish the office space and provide your own equipment.

Under the contact, the unit of measure for pricing (remuneration) is every three months (quarter), from month 20XX to XX month 20XX. You will be paid $X including GST every quarter. The first quarter will be pro rata based on start date in the first quarter.

The total contract remuneration incorporates Person A's wage, Person B's wage, and budgeted expenses.

You provided a copy of your contract which outlines the services to be provided.

Your tasks include, among other things, reviewing and updating manuals and risk assessments, facilitating, and delivering trainings and providing psychological strategies.

As stated under the contract, deliverables will be ongoing during the life of the contract including staff training and clinical reviews.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 84-5

Income Tax Assessment Act 1997 section 87-15

Income Tax Assessment Act 1997 section 87-18

Income Tax Assessment Act 1997 section 87-20

Income Tax Assessment Act 1997 section 87-25

Income Tax Assessment Act 1997 section 87-30

Income Tax Assessment Act 1997 section 87-65

Reasons for decision

Question 1

Is the income you receive personal services income (PSI) under section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The income the company received for providing services is mainly a reward for the personal skills and experience of the individual(s) who performed the work. Therefore, the income derived during the relevant income year is personal services income.

Detailed reasoning

Section 84-5 of the ITAA 1997 provides that the ordinary or statutory income of an individual or entity is an individual's personal services income (PSI) if the income is mainly a reward for the individuals personal efforts or skills (or would mainly be such a reward if it was the income of the individual).

Income earned by an employee is PSI, however the PSI rules do not apply to income received as an employee unless they are an employee of an interposed entity.

Income that is mainly generated from the sale or supply of goods, the supply and use of income producing assets, or from a business structure is not PSI.

Only individuals can have PSI. PSI can be earned directly by an individual or indirectly through a company, partnership or trust (personal services entity).

A personal services entity (PSE) is a partnership, company or trust that receives the PSI of one or more individuals and is interposed between the individual(s) providing the work or services and the service acquirer.

Where multiple individuals work together through a PSE, each discrete amount of income received by the PSE needs to be examined to determine which individual mainly generated that income.

The company is a personal services entity (PSE) as it receives PSI of one or more individuals and is interposed between the individual(s) providing the services and the service acquirer.

The income the company received in the relevant income year for the services performed by Person A is mainly a reward for their personal efforts and skills and is Person A's PSI.

Person B separately performed services for Entity A on behalf of the company. Therefore, the income received by the company for the services provided by Person B is mainly a reward for their personal efforts and skills and is Person B's PSI.

Consequently, the income derived by the company is mainly a reward for personal efforts and skills of the individual(s) who performed the services and is PSI pursuant to section 84-5 of the ITAA 1997.

Question 2

Do you meet the results test outlined in section 87-18 of the ITAA 1997 for the relevant income year?

Summary

The Commissioner considers that you have not met all the required limbs under the results test, for the relevant income year.

Detailed reasoning

Subsection 87-18(3) of the ITAA 1997 states that a personal services entity meets the results test in an income year if, in relation to at least 75% of the personal services income of one or more individuals that is included in the entity's ordinary or statutory income during the income year, the entity satisfies all of the 3 conditions listed below:

(a)             the income is for producing a result; and

(b)             the personal services entity is required to supply the plant and equipment, or tools of trade, needed to perform the work from which the personal services entity produces the result; and

(c)             the personal services entity is, or would be, liable for the cost of rectifying any defect in the work performed.

Producing a result

Taxation Ruling TR 2022/3 Income Tax: personal services income and personal services business discusses the meaning of the phrase 'producing a result'. It says that the essence of the contract must be to achieve a result and not to do work. The fact that a sole trader or PSE is required to complete identifiable tasks is not the same as achieving a result if those tasks merely form part of the work being paid for on an ongoing basis.

In results-based contracts, payment is usually made for a negotiated contract price, and is paid only when the contractual conditions have been fulfilled. Where remuneration is payable on the contractual conditions being fulfilled, the remuneration is for producing a result.

The results test will not be satisfied merely because the contract states that the personal services income is for producing a result.

In your case, you are contracted to perform a series of identifiable tasks such as reviewing and updating manuals and risk assessments, facilitating, and delivering trainings and providing psychological strategies. However, there are no time restrictions on these tasks that align with the quarterly remuneration to show a fixed sum on completion of a specified outcome or result.

You are also contracted to ensure you are available on a consistent basis during regular business hours to provide professional advice and support to project staff as required. This indicates you are paid for your ongoing services and hours worked, rather than to produce a result.

Conclusion

Given that the results test requires all three limbs to be met for the results test to be satisfied, it is not necessary to consider the remaining conditions, as the test cannot be satisfied by virtue of the first limb not being met.

The PSI earned in the relevant income year is for ongoing professional services provided for the life of the contract, and not for producing a result. Consequently, you do not meet the results test as outlined in 87-18 of the ITAA 1997.

Question 3

Did you conduct a personal services business in the relevant income year?

Summary

As more than 80% of your income in the relevant income year is from the same entity and you did not pass the results test, or have a personal services business determination in place, the personal services income is not taken to be conducted by a personal services business.

Detailed Reasoning

Division 87 of the ITAA 1997 provides guidance on what a personal service business is and how to determine if an individual or PSE is conducting a personal services business.

Section 87-15 of the ITAA 1997 sets out how to determine whether a sole trader or PSE is conducting a PSB and states:

An individual or personal services entity conducts a personal services business if:

(a)  For an individual - a personal services business determination is in force relating to the individual's personal services income; or

(b)  For a personal services entity - a personal services business determination is in force relating to an individual whose personal services income is included in the entity's ordinary or statutory income; or

(c)   In any case - the individual or entity meets at least one of the 4 personal services business tests in the income year for which the question whether the individual or entity is conducting a personal services business is in issue.

There are four PSB tests:

•         the results test;[1]

•         the unrelated clients test;[2]

•         the employment test;[3] and

•         the business premises test.[4]

Unrelated clients test

To meet the unrelated clients test in an income year, you are required to provide services to 2 or more entities that are not associates of each other and are also not associates of you. The services must also be provided as a direct result of making offers or invitations to the public at large (or to a section of the public). It is considered that you do not meet the unrelated clients test for the relevant income year.

Employment test

The employment test looks at the PSI of the individual to determine if at least 20% by market value of the PSI is gained with the assistance of others.

Subparagraph 87-25(2)(a)(i) provides that individuals whose personal services income is included in the PSE's ordinary or statutory income cannot be counted for the purpose of determining whether the PSE passes the employment test.

Person B provides services separate to Person A, and the income which is mainly a reward for their efforts and skills is included in the company's ordinary income. Therefore, Person B cannot be counted for the purpose of the employment test. Consequently, as no others assisted Person A in gaining or producing at least 20% (by market value) of Person A's PSI, the employment test is not met by the company in the relevant income year.

Business premises test

You do not have exclusive use of business premises where activities to produce your PSI are conducted. You have been provided an office space for the company's use within an Entity A centre where other youth programs are conducted by unrelated parties. Consequently, the business premises test is not met.

Results test

As explained in Question 2, you do not meet the results test for the relevant income year.

In accordance with subsection 87-15(3), if 80% or more of an individual's personal services income is from the same entity and:

      i.        the individual's personal service income is included in the personal services entity's ordinary or statutory income during the income year; and

     ii.        the personal services entity does not meet the results test under section 87-18 of the ITAA 1997 in that income year,

the personal services entity is not taken to be conducting a personal service business unless there is a personal services business determination (PSBD) in force.

Section 87-65 of the ITAA 1997 sets out the grounds on which the Commissioner may issue a PSBD with respect to a personal service entity.

Subsection 87-65(3) states that the Commissioner must not make a PSBD unless satisfied that, in the income year, one or more of the four conditions in subsections 87-65(3A), (3B), (5) and (6) of the ITAA 1997 are met.

Based on the information provided, it is considered that you do not meet any of the four conditions in subsections 87-65(3A), (3B), (5) and (6) for the 2023-24 income year.

Consequently, the Commissioner does not consider you conduct a personal services business in relation to the personal services income of Person A for the relevant income year.

[1] Section 87-18 of the ITAA 1997.

[2] Section 87-20 of the ITAA 1997.

[3] Section 87-25 of the ITAA 1997.

[4] Section 87-30 of the ITAA 1997.

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