DIBARR PTY LTD v FC of T

Members:
KL Beddoe SM
SC Fisher M

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2004] AATA 1030

Decision date: 1 October 2004

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KL Beddoe (Senior Member) and SC Fisher (Member)

Introduction

1. This is an application for review of the Respondent's decision of 28 April 2003 to refuse the Applicant a personal services business determination for the year ending 30 June 2001 (``the year of income''). The Respondent may make personal services business determinations pursuant to the provisions of subdivision 87-B of Division 87 of the Income Tax Assessment Act 1997 (``the ITAA 1997''). Section 87-85 the Act provides that a person who is dissatisfied with, among other things, the Respondent's refusal of an application for a personal services business determination may object against the decision in the manner set out in Part IVC of the Taxation Administration Act 1953. The Applicant has done so and the Respondent disallowed the objection, thus leading to this application for review.

2. In these Reasons for Decision, references to statutory provisions are references to provisions of the ITAA 1997 unless the context indicates otherwise.

Background

3. Dibarr Pty Ltd (``the Applicant'') was incorporated on 21 July 1980. The core business of the Applicant is to provide computer consultancy services. The Applicant employs Mr Barry John Gluch and his wife in the Applicant's business. Beginning in February 1999 and continuing to the date of hearing, the Applicant contracted with Campbell Brothers Ltd to provide the services of Mr Gluch to Campbell Brothers Ltd. The services provided by the Applicant through its employee Mr Gluch to Campbell Brothers Ltd both before and during the year of income include information technology project planning, supervision and implementation services.

The material before the Tribunal

4. The Applicant lodged a written statement for its witness Mr Barry Gluch and tendered documentary exhibit A, which was taken into evidence by the Tribunal. The Applicant was represented by Mr K Robertson, taxation agent.

5. The Respondent lodged documents T1 to T8 under section 37 of the Administrative Appeals Tribunal Act 1975 and tendered documentary exhibits 1 to 3, which were taken into evidence by the Tribunal. The Respondent was represented by Dr M Robertson of counsel.

6. Both parties lodged a statement of facts and contentions and the Respondent lodged an outline of submissions.

Evidence

7. Mr Barry Gluch and Mr Andrew Austin (Chief Financial Officer and Company Secretary of Campbell Brothers Ltd) testified for the Applicant. The Applicant did not lodge a witness statement for its witness Mr Austin.

8. The Respondent did not call any evidence.

9. In this appeal, there were no significant differences between the parties concerning the primary facts. For this reason, the Tribunal decided that it is not necessary to recite the evidence of the witnesses called by the Applicant at any length. What is in contest was the taxation and other legal consequences of the facts as they emerged from the oral and documentary evidence presented. In the Tribunal documents are letters dated 2 April 2003 and 18 December 2003 on the letterhead of Campbell Brothers Ltd that record the terms of the engagement by Campbell Brothers Ltd of the Applicant.

Issues

10. The issues in this appeal are as follows:

• (a) whether the income of the Applicant is personal service income;
• (b) if so, whether the results test, as specified in subsection 87-18(3) of the ITAA 1997 is satisfied or could reasonably be expected to be satisfied; or
• (c) if not, whether the Applicant meets at least one of the other three personal services business tests in the income year.

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Summary of the legislative scheme

11. It is commonplace in commercial affairs that commercial transactions are structured so as to secure the most beneficial taxation treatment, from the viewpoint of the taxpayer:
Frank Lyon Co v United States (1978) 435 US 561 at 580 cited in
FC of T v Spotless Services Limited & Anor 96 ATC 5201 at 5206; (1996) 186 CLR 404 at 416; and
FC of T v Hart & Anor 2004 ATC 4599; [2004] HCA 26. For many years, in response to revenue considerations, taxpayers have recoursed to the selection of different types of business entities when selecting the appropriate type of vehicle with which to conduct business and personal affairs in the course of generating assessable income. The New Business Tax System (Alienation of Personal Services Income) Act 2000 amended the ITAA 1997 by inserting a new Part 2-42 into that Act. Part 2-42 was introduced following recommendations made in the report, Review of Business Taxation: A Tax System Redesigned (commonly called ``the Ralph Report''):
FC of T v Metaskills Pty Ltd 2003 ATC 4644 at 4646 [16]; [2003] FCA 766 at [16]. Part 2-42 of the ITAA 1997 contains the alienation measure that sets out the income tax treatment of the ordinary or statutory income of an individual or a personal services entity that is an individual's personal services income. The provisions of Part 2-42 were amended by the Taxation Laws Amendment Act (No 6) 2001, to take effect from the beginning of the 2000-2001 income year:
FC of T v Metaskills Pty Ltd 2003 ATC 4644 at 4646 [15]; [2003] FCA 766 at [ 15].

12. The personal services income regime under Part 2-42 of the ITAA 1997 can be summarised in these terms. Division 84 defines ``personal services income''. Division 85 sets out amounts, relating to personal services income, that an individual cannot deduct. In particular, deductions that are unavailable to an employee are similarly unavailable to an individual who has personal services income and who is not an employee: see section 85-1. Division 85 does not apply if the individual is conducting a personal services business or receives the income as an employee or office holder: see section 85-1. The object of Division 86 is to ensure that individuals cannot reduce or defer their income tax (and other liabilities) by alienating their personal services income through companies, partnerships or trusts that are not conducting personal services businesses: section 86-10. Under section 86-5(2), Division 86 has the effect of attributing the personal services entity's income from the personal services to the individual who performed them (unless the income is promptly paid to the individual as salary). Because of Division 87, and in particular section 87-1, Divisions 85 and 86 do not apply to personal services income that is income from conducting a personal services business: section 87-1. A personal services business exists if there is a personal services business determination or if one or more of 4 tests for what is a personal services business are met: section 87-1.

13. It is the Respondent which is empowered to make a personal services business determination, relying on the powers conferred on the Respondent under Subdivision 87B and, in particular, under section 87-65. If the Respondent makes a personal service business determination, then the personal services income is income from conducting a personal services business: section 87-5. If the Respondent does not make a personal services business determination, then the personal services income is not income from conducting a personal services business: section 87-5. The alternative pathway if a taxpayer does not obtain a personal services business determination from the Respondent is for the taxpayer to meet 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: sections 87-15(1)(c) and 87-15(2).

Applicant's submissions

14. The Applicant provided a Statement of Facts and Contentions. In summary form, the Applicant contended that:

• (a) the Applicant made an application in the approved form for a personal services business determination under section 87-70;
• (b) the Applicant has complied with the requirements of the results test set out in section 87-18(3);
• (c) the Applicant satisfies the preponderant part of the criteria for being an independent contractor to produce a result for its client (Campbell Brothers Ltd) under Taxation Ruling TR 2001/8, para 110, in turn drawing on Taxation Ruling TR 2000/14;

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• (d) the Respondent was obliged to make a personal services business determination in favour of the Applicant under section 87-65.

15. The submissions of the Applicant are considered in more detail later in these Reasons for Decision.

Respondent's submissions

16. The Respondent provided a Statement of Facts and Contentions and also an outline of submissions. In summary form, the Respondent contended that:

• (a) the Applicant is a personal services entity within section 86-15(2).
• (b) the Applicant is deriving personal services income within the meaning of section 86-15.
• (c) the Applicant is not a personal services entity that conducts a personal services business within the meaning of section 86-15(3), and the other two exceptions contained within section is 86-15(4) and (5) do not apply for the benefit of the Applicant;
• (d) the Applicant has not complied with the requirements of the results test set out in section 87-18(3), and that any arrangement between the Applicant and its client (Campbell Brothers Ltd) is little more than a conventional or routine employment relationship between Campbell Brothers Ltd and Mr Gluch with an interposed corporate entity (Applicant).
• (e) the Applicant does not satisfy the preponderant part of the criteria for being an independent contractor to produce a result for its client (Campbell Brothers Ltd) under Taxation Ruling TR 2001/8, para 110, in turn drawing on Taxation Ruling TR 2000/14;
• (f) accordingly, the Respondent was not obliged to make a personal services business determination in favour of the Applicant under section 87-65.

17. The submissions of the Respondent are considered in more detail later in these Reasons for Decision.

Findings of fact

18. Based upon the evidence before the Tribunal, both in documentary and oral form, the Tribunal makes the following findings of fact:

• (a) Dibarr Pty Ltd was incorporated on 21 July 1980.
• (b) Mr Barry John Gluch is a director of the Applicant.
• (c) The core business of the Applicant is to provide computer consultancy services. The business of the Applicant operates out of the private residence of one of its directors, Mr Gluch.
• (d) The Applicant employs Mr Gluch and his wife in its business. The Applicant employs no other people besides these two persons.
• (e) During the 1998/1999 and 1999/2000 fiscal years, the Applicant had 4 contracts to supply computer consultancy services.
• (f) Beginning in February 1999 and continuing to the date of hearing, the Applicant contracted with Campbell Brothers Ltd to provide the services of Mr Gluch to Campbell Brothers Ltd. The services provided by the Applicant through its employee Mr Gluch to Campbell Brothers Ltd both before and during the year of income include information technology project planning, supervision and implementation services.
• (g) The agreement between the Applicant and Campbell Brothers Ltd under which the Applicant supplied computing consultancy services to the Campbell Brothers Ltd not in writing and is based upon engagement on a project-by-project basis.
• (h) The essential terms of the engagement of the Applicant by Campbell Brothers Ltd include:
  • i. The Applicant is engaged on a project- by-project basis with six-month reviews.
  • ii. The engagement can be terminated by either party at any time on reasonable notice.
  • iii. Campbell Brothers Ltd pays the Applicant at an agreed hourly rate (capped at $2750 exclusive of GST per week for a 40 hour week, unless otherwise agreed).
  • iv. If the Applicant provides services for less than 40 hours per week, then the Applicant only invoices Campbell Brothers Ltd for the actual time spent.
  • v. The Applicant is responsible for determining how work on any given project is undertaken. The Applicant sets its own hours and place of work.

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  • vi. For convenience, Campbell Brothers Ltd provides the Applicant with an office for the Applicant to use as it chooses.
  • vii. The Applicant must supply its own equipment in the performance of the services. The venue where the services are provided includes office space at the premises of Campbell Brothers Ltd.
  • viii. Mr Gluch, on behalf of the Applicant, performs some of the work on Campbells Brothers Ltd projects other than on the premises of Campbells Brothers Ltd.
  • ix. The Applicant may delegate work on any Campbells Brothers Ltd project to any person it chooses (besides Mr Gluch) by mutual agreement.
  • x. The Applicant is responsible for its work under any Campbell Brothers Ltd project and also for any rectification required to bring any project may successful conclusion.
  • xi. Campbell Brothers Ltd does not accept any of the commercial risk that the Applicant is responsible for in any given project. If the Applicant takes longer to complete project milestones than the agreed timelines, then Campbell Brothers Ltd does not pay the Applicant for that additional time.
  • xii. The Applicant invoices Campbell Brothers Ltd on a monthly basis (in arrears). The Applicant may include in any invoices any out-of-pocket expenses incurred on behalf of Campbell Brothers Ltd.
  • xiii. Campbell Brothers Ltd pays for some expenses (travel, meals and accommodation) that would otherwise be the responsibility of the Applicant.
  • xiv. Campbell Brothers Ltd does not pay the Applicant any allowances or leave entitlements.
  • xv. Campbell Brothers Ltd does not pay the Applicant for services provided when Mr Gluch is not in attendance.
  • xvi. In the preparatory stages to engaging the Applicant for any given project, Campbell Brothers Ltd seeks a quote from the Applicant. There is no competitive tender or bidding process conducted by Campbell Brothers Ltd in determining the choice of information technology contractors for these projects.
• (i) The Applicant pays its own costs for its computing infrastructure, transport, mobile telephones and other business overheads. Except as indicated otherwise earlier in these findings, these expenses are not reimbursed by Campbell Brothers Ltd.
• (j) For the year of income, 100% of the income of the Applicant was derived from its computing consulting arrangements with Campbell Brothers Ltd.
• (k) There is a strong, positive and long-term commercial relationship between the Applicant and Campbell Brothers Ltd. Campbell Brothers Ltd has provided the Applicant with a steady stream of work since February 1999.
• (l) During the year of income, Campbell Brothers Ltd has never called upon the Applicant to rectify any of its work.
• (m) During the year of income, the Applicant has not engaged any other contractors to perform any part of its engagement by Campbell Brothers Ltd.
• (n) During the year of income, the Applicant has not performed remunerative work for any other person.
• (o) On or about 14 April 2003, the Applicant filed an application for a personal services business determination for the year of income ended 30 June 2001.
• (p) On or about 28 April 2003, the Respondent issued a Notice of Refusal to issue a personal services business determination, together with reasons for decision, to be Applicant.
• (q) On or about 25 June 2003, the Applicant filed a Notice of Objection against the 28 April 2003 refusal decision.
• (r) On or about 28 July 2003, the Respondent issued a Notice of Decision on Objection, disallowing the Applicant's objection in full.
• (s) On 25 September 2003, the Applicant filed an Application for Review of the Respondent's decision with the Tribunal.

Tribunal's reasons

19. In accordance with section 14ZZK of the Taxation Administration Act 1953, unless the Tribunal orders otherwise, an application for review of a reviewable objection decision is

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limited to the grounds stated in the objection to which the decision relates. The Tribunal was not asked to, nor did it, order that the grounds before it were to be enlarged or changed in any manner.

20. The Tribunal began with section 87-65. This provision provides machinery by which the Respondent may make a personal services business determination relating to an individual's personal services income that is included in the entity's ordinary income or statutory income by giving written notice to a personal services entity whose ordinary income or statutory income includes some or all of an individual's personal services income. A personal services business determination produces the effect that alienated personal services income can be treated as alienated, avoiding the elision between the entity and a person who in fact supplies the personal services behind the entity that is otherwise predicated by Part 2.42. All of this is subject of course to the operation and effect of the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936, which may still apply to cases of alienation of personal services income that fall outside Division 86 (see the Note to section 86-10). Leaving aside, for the moment, whether there is any personal services income relevant to the Applicant or to Mr Gluch, in this case the Respondent refused to make a personal services business determination under section 87-65 in favour of the Applicant because the Respondent was not satisfied, within the meaning of section 87-65(3), that the conditions laid down in one or more of sections 87-65(3), (3A), (3B), (5) and (6) were met. There is no issue in this appeal about any deductions relating to personal services income within Division 85.

21. The next issue in this appeal is whether the income of the Applicant is personal services income. Section 84-5 defines personal services income in these terms:

``84-5 Meaning of personal services income

(1) Your ordinary income or statutory income, or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income).

Example 1:

NewIT Pty Ltd provides computer programming services, but Ron does all the work involved in providing those services. Ron uses the clients' equipment and software to do the work. NewIT's ordinary income from providing the services is Ron's personal services income because it is a reward for his personal efforts or skills.

Example 2:

Trux Pty Ltd owns one semi-trailer, and Tom is the only person who drives it. Trux's ordinary income from transporting goods is not Tom's personal services income because it is produced mainly by use of the semi- trailer, and not mainly as a reward for Tom's personal efforts or skills.

Example 3:

Jim works as an accountant for a large accounting firm that employs many accountants. None of the firm's ordinary income or statutory income is Jim's personal services income because it is produced mainly by the firm's business structure, and not mainly as a reward for Jim's personal efforts or skills.

(2) Only individuals can have personal services income.

(3) This section applies whether the income is for doing work or is for producing a result.

(4) The fact that the income is payable under a contract does not stop the income being mainly a reward for your personal efforts or skills.''

22. It was not disputed between the parties that during the year of income the Applicant derived ordinary income through an ongoing contractual relationship with Campbell Brothers Ltd, and that this income related mainly to the personal efforts of Mr Gluch. Because of section 84-5(2), only an individual, such as a person in the position of Mr Gluch, can have personal services income. The issue is, however, whether the ordinary income derived by the Applicant from the provision of services to Campbell Brothers Ltd is personal services income of Mr Gluch because of section 84-5. In this case, the evidence before the Tribunal is that Mr Gluch has applied his personal efforts or skills in providing computer consultancy

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services through the Applicant. The income received by the Applicant from Campbell Brothers Ltd is mainly a reward for Mr Gluch's personal efforts or skills (or would mainly be such a reward if it was Mr Gluch's income other than passing through the Applicant) within the meaning of section 84-5. Accordingly, the Tribunal was satisfied that the income of the Applicant in the year of income was personal services income within section 84-5. The Tribunal noted that the essential material facts in this case corresponded to Example 1 in section 84-5 (with the exception that in this case in contradistinction to Example 1, the Applicant supplies its own computing equipment rather than using the software and hardware of the client).

23. The Tribunal went on to consider section 86-15, which states:

``86-15 Effect of obtaining personal services income through a personal services entity

Amounts included in your assessable income

(1) Your assessable income includes an amount of ordinary income or statutory income of a personal services entity that is your personal services income.

Example:

Continuing example 1 in section 84-5: Assume that NewIT only provides services to one client. Ron's assessable income includes ordinary income of NewIT from providing the computer programming services, because the income is Ron's personal services income.

Note:The amount included in your assessable income can be reduced by certain deductions to which the personal services entity is entitled: see section 86-20.

(2) A personal services entity is a company, partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals.

Exception: personal services businesses

(3) This section does not apply if that amount is income from the personal services entity conducting a personal services business.

Note:Even if the entity is conducting a personal services business, it is possible that some of its income is not income from conducting that business.

Exception: amounts promptly paid to you as salary or wages

(4) This section does not apply to the extent that:

• (a) the personal services entity pays that amount to you, as an employee, as salary or wages; and
• (b) the payment is made before the end of the 14th day after the PAYG payment period during which the amount became ordinary income or statutory income of the entity.

Note:The entity is obliged to withhold amounts from salary or wages paid before the end of that day: see section 12-35 in Schedule 1 to the Taxation Administration Act 1953.

Exception: exempt income etc.

(5) This section only applies to the extent that that amount would be assessable income of the personal services entity if this Division did not apply.

Example:

If the entity's income includes an amount that is your personal services income for a service on which GST is payable, the amount included in your assessable income will not include the GST, because the GST is neither assessable income nor exempt income of the entity: see section 17-5.''

24. It was contended by the Respondent that the Applicant was a personal services entity within the meaning of section 86-15(2). The evidence before the Tribunal is that the Applicant is a company whose ordinary income includes the personal services income of Mr Gluch as an individual associated with the Applicant as a company. Accordingly, the Tribunal was satisfied that the Applicant is a personal services entity. Reading and applying sections 86-15(1) and (2) together, the ordinary income of the Applicant as a personal services entity is the personal services income of Mr Gluch. Unless any of the exceptions contained within sections 86-15(3)-(5) apply, the effect of sections 86-15(1) and (2) is to attribute to an

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individual (in this case, Mr Gluch) the personal services income of the Applicant as a personal services entity.

25. The Tribunal went on to consider whether any of the exceptions contained within sections 86-15(3)-(5) apply in this case. In the circumstances of this case, and having regard to the way that it was argued, the Tribunal focused upon section 86-15(3) (set out above). If section 86-15(3) applies, that is to say, if income is derived by the personal services entity (the Applicant) from conducting a personal services business, then the income is not personal services income that is attributed to Mr Gluch. For section 86-15(3) to apply to the present case, the Applicant as a personal service entity must conduct a personal services business.

26. This led the Tribunal to consider whether the Applicant is conducting a personal services business. This issue is regulated by section 87-15, which reads:

``87-15 What is a personal services business?

(1) 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 income 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.

Note1:For personal services business determinations, see Subdivision 87-B.

Note2:Under subsection (3), the personal services business tests, apart from the results test under section 87-18, do not apply if 80% or more of your personal services income is from one source (but they can still be used in deciding whether to make a personal services business determination).

(2) The 4 personal services business tests are:

• (a) the results test under section 87-18; and
• (b) the unrelated clients test under section 87-20; and
• (c) the employment test under section 87-25; and
• (d) the business premises test under section 87-30.

(3) However, if 80% or more of an individual's personal services income (not including income referred to in subsection (4)) during an income year is income from the same entity (or one entity and its associates), and:

• (a) the individual's personal services income is not included in a personal services entity's ordinary income or statutory income during an income year, and the individual does not meet the results test under section 87-18 in that income year; or
• (b) the individual's personal services income is included in a personal services entity's ordinary income or statutory income during an income year, and the entity does not, in relation to the individual, meet the results test under section 87-18 in that income year;

the individual's personal services income is not taken to be from conducting a personal services business unless:

• (c) when the personal services income is gained or produced, a personal services business determination is in force relating to the individual's personal services income; and
• (d) if the determination was made on the application of a personal services entity - the individual's personal services income is income from the entity conducting the personal services business.

Note:Sections 87-35 and 87-40 affect the operation of subsection (3) in relation to Australian government agencies and certain agents.

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(4) Subsection (3) does not apply to income:

• (a) that the individual receives as an employee; or
• (b) that the individual receives as an individual referred to in paragraph 12-45(1)(a), (b), (c), (d) or (e) (payments to office holders) in Schedule 1 to the Taxation Administration Act 1953; or
• (c) to the extent that it is a payment referred to in section 12-47 (payments to religious practitioners) in that Schedule.''

27. Under section 87-15(1)(c), an individual or personal services entity conducts a personal services business if an individual or entity meets at least one of the four 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. What differentiates section 87-15(1)(c) from sections 87-15(1)(a) and (b) is that the latter two provisions depend upon the exercise of an administrative act (the issue of a personal services business determination by the Respondent) whereas section 87-15(1)(c) provides a self-assessment regime under which a taxpayer may determine that the taxpayer is outside of the alienation of personal services income regime (see Taxation Ruling TR 2001/8, paragraph 27). In this case, there was no need for the Tribunal to consider the operation of section 87-15(3) (as to which see
FC of T v Metaskills Pty Ltd 2003 ATC 4644 at 4648 [26]; [2003] FCA 766 at [26]).

28. The four personal services business tests are signposted in section 87-15(2). This case was argued on the basis that the only relevant test was the results test under section 87-18. The Tribunal proceeded to consider section 87-18, which reads:

``87-18 The results test for a personal services business

(1) An individual meets the results test in an income year if, in relation to at least 75% of the individual's personal services income (not including income referred to in subsection (2)) during the income year:

• (a) the income is for producing a result; and
• (b) the individual is required to supply the plant and equipment, or tools of trade, needed to perform the work from which the individual produces the result; and
• (c) the individual is, or would be, liable for the cost of rectifying any defect in the work performed.

(2) Paragraph (1)(a) does not apply to income:

• (a) that the individual receives as an employee; or
• (b) that the individual receives as an individual referred to in paragraph 12-45(1)(a), (b), (c), (d) or (e) (payments to office holders) in Schedule 1 to the Taxation Administration Act 1953; or
• (c) to the extent that it is a payment referred to in section 12-47 (payments to religious practitioners) in that Schedule.

(3) 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 personal services entity's ordinary income or statutory income during the income year:

• (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.

(4) For the purposes of paragraph (1)(a), (b) or (c) or (3)(a), (b) or (c), regard is to be had to whether it is the custom or practice, when work of the kind in question is performed by an entity other than an employee:

• (a) for the personal services income from the work to be for producing a result; and
• (b) for the entity to be required to supply the plant and equipment, or tools of trade, needed to perform the work; and
• (c) for the entity to be liable for the cost of rectifying any defect in the work performed;

as the case requires.''

29. In this case, the operative provision of section 87-18 is section 87-18(3) (as

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supplemented by section 87-18(4)) because the Applicant is a personal services entity for the reasons given earlier in these Reasons for Decision. In order for the Applicant to self- assess as conducting or operating a personal services business, the Applicant must satisfy the Tribunal that:

• (a) the personal services income of the Applicant from its arrangement with Campbell Brothers Ltd is for producing a result; and
• (b) the Applicant (as a personal services entity) is required to supply the plant and equipment, or tools of trade, needed to perform the work from which the Applicant produces the result; and
• (c) the Applicant is, or would be, liable for the cost of rectifying any defect in the work performed.

30. The Respondent relied on its view of the operation of the results test contained in Taxation Ruling TR 2001/8, paragraphs 33-38 in support of the contention that the Applicant does not work in order to produce a result. In contrast, the Applicant argued that its arrangement with the Campbell Brothers Ltd is to produce a result. While the result that was said to be produced was not identified clearly by the Applicant, the Tribunal was prepared to infer from the material before it that the result said to be produced by the Applicant was the maintenance, upgrading and enhancement of the information technology systems and network of Campbell Brothers Ltd via processes that included information technology project planning, supervision and implement- ation services.

31. In these Reasons for Decision, it is not necessary to recite extensively all of the components of the parties' arguments on the satisfaction or non-satisfaction of the results test. It suffices to record that the Applicant contended that when the traditional criteria for distinguishing independent contractors from employees taken from Taxation Ruling TR 2000/14 are uplifted and applied to the facts of the present case, it followed that the Applicant was producing a result in a manner akin to an independent contractor producing a result for its counterparty rather than being equated to an employee. The Applicant stressed factors no 2, 3, 4, 5 and 6 from Taxation Ruling TR 2000/14, as reiterated in Taxation Ruling TR 2001/8, para 110. In relation to factor no 3, the Applicant contended that it carried its own commercial risk in the shape of the principle or norm that if it took too long to carry out a particular information technology project or segment of such project, then it could not normally charge the excess time worked to Campbell Brothers Ltd. In relation to fact no 4, the Applicant contended that it was free to set its own hours of work or place of work. The Applicant relied upon paragraph 111 from Taxation Ruling TR 2001/8, where it is stated that, ``While these factors are indicative of there being a results-based contract, not all of the factors need to be present for the purposes of the results test''. The Applicant argued that while it did not satisfy all of the 11 factors, nevertheless it is satisfied sufficient of them to satisfy the results test.

32. In relation to the task of distinguishing of independent contractors from employees, the Respondent argued that when the factors taken from Taxation Ruling TR 2000/14 were applied to the present case, that in reality and in substance, the Applicant was closer to an employee than an independent contractor. The Respondent placed considerable emphasis upon the fact that the Applicant was paid up to a maximum of 40 hours per week irrespective of whether or not work in excess of 40 hours was performed by Mr Gluch on behalf of the Applicant. The Respondent also pointed to the fact of payment by Campbell Brothers Ltd of some travel expenses on behalf of the Applicant instead of the Applicant incurring its own expenses in that regard and obtaining reimbursement from Campbell Brothers Ltd. The Respondent stressed that the Applicant was not at liberty to sub-contract its services to any third party (besides Mr Gluch) without the consent of Campbell Brothers Ltd. The Tribunal noted the evidence of Mr Austin (called on behalf of the Applicant) in re- examination that this requirement for the consent of Campbell Brothers Ltd before the Applicant could sub-contract its performance of computing consultancy services was characterised as ``good business practice''.

33. Among other contentions of the Respondent, the Respondent argued that:

• (a) the Applicant was entitled to regular payments on production of invoices on a piecemeal basis during any course of a particular project rather than the Applicant

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  being paid on the completion of a particular project;
• (b) the capacity of either the Applicant or Campbell Brothers Ltd to terminate the contract at any time was said to be antithetical to a contract to produce a result; and
• (c) the relationship between the Applicant and Campbell Brothers Ltd is ongoing rather than short-term or punctuated by gaps between particular projects.

34. As it appeared to the Tribunal, the nub of the Respondent's argument is that the Applicant has contracted with Campbell Brothers Ltd to supply the ongoing services and expertise of Mr Gluch and is paid personal services income for those services supplied.

35. The Tribunal is of the opinion that it is not simply a quantitative matter of determining how many of the 11 relevant factors are or are not satisfied in any given case as part of the process of determining whether or not the results test in section 87-18(3)(a) is satisfied. The task is much more subtle that applying a crude quantitative yardstick, and extends to a qualitative assessment as to whether or not the totality of the circumstances in any given case, including one such as the present, call for the production of a result by a person in the position of the Applicant. As the Federal Court said in
FC of T v Metaskills Pty Ltd 2003 ATC 4644 at 4648 [28]; [2003] FCA 766 at [28]:

``Broadly speaking, an individual or entity, who or which is an `independent contractor' under traditional concepts should meet the results test. Indeed, the Revised Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 2001 (Cth) stated (at par 7.6): `the results test... is based on the traditional tests for determining independent contractors'.''

36. This led the Tribunal to consider whether the Applicant satisfies the results test by virtue of being an independent contractor. Windeyer J said in
Marshall v Whittaker's Building Supply Co (1963) 109 CLR 210 at 217 that there is a difference between a person who serves their employer in the employer's business and a person who carries a trade or business of their own. The conceptual tool that is used to separate these two categories is the contractor has undertaken to produce a given result and the amount to be paid under the contract becomes payable when and only when the contractual conditions have been fulfilled: see
Neale (DFC of T) v Atlas Products (Vic) Pty Ltd (1955) 10 ATD 460; (1955) 94 CLR 419 and
Queensland Stations Pty Ltd v FC of T (1945) 8 ATD 30 at 31 and 33; (1945) 70 CLR 539 at 545 and 548. In other words, the outcome is to produce a result and the achievement of the agreed result qualifies or entitles the service provider to be paid.

37. The Respondent relied upon the decision of the Court of Appeal of the Supreme Court of New South Wales in
World Book (Australia) Pty Ltd v FC of T 92 ATC 4327; 23 ATR 412 in support of the contention that the Applicant was contractually obliged to provide Mr Gluch to perform the services personally, and that this was antithetical to a contract to produce a result. The Tribunal regarded the decision in the World Book case to be of some relevance and assistance in this case because that case was dealing with section 221A(2)(b) of the Income Tax Assessment Act 1936 where there is a distinction between a contract for labour and a contract where the contractor has undertaken to produce a given result. The distinction that emerged in World Book operates in the background to the results test in section 87-18(3)(a).

38. The Respondent contended that the distinction between an entire contract to produce a result and an ongoing or divisible contract for work was applicable in this case, and referred to the decision of St George Jessel MR in
Re Hall and Barker (1878) 9 Ch D 538 at 545 (referred to approvingly by Mason CJ in
Baltic Shipping Company v Dillon (1993) 176 CLR 344 at 348) in support of this distinction. From this baseline, the Respondent argued that in the case of an entire contract, a contracting party is paid for the result produced not for the personal exertion expended to achieve that result. The Tribunal accepted that this distinction is relevant in the case of the Applicant and its arrangement with Campbell Brothers Ltd. The Tribunal was not able, in this case, to determine from copies of the invoices supplied as appear in the Tribunal documents details of particular projects for which the Applicant supplied the services of Mr Gluch to Campbell Brothers Ltd. Many of the invoices rendered by the Applicant (for example, the invoices contained at folios T25, T27, T28 and T31) referred to the provision of computer

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ATC 2288

consultancy services without differentiation as to the particular project in which Mr Gluch was engaged. Some invoices rendered by the Applicant (for example, the invoices contained at folios T30 and T33) did indicate particular projects that were the subject of the payment request by the Applicant. The Tribunal was of the opinion that the arrangement between the Applicant and Campbell Brothers Ltd was not an entire contract, the execution of which entitles the Applicant to payment for the service rendered.

39. The Respondent argued that the decision of this Tribunal in
Scimitar Systems Pty Ltd v DFC of T 2004 ATC 2176; [2004] AATA 720 was indistinguishable from this case in that in that case the results test was not satisfied where the personal services entity did not meet any of the three elements of the results test contained in section 87-18(3) (see
Scimitar Systems Pty Ltd v DFC of T 2004 ATC 2176 at 2185 [18]; [2004] AATA 720 at [18]).

40. The decision of the High Court of Australia in
Hollis v Vabu Pty Ltd (t/a Crisis Couriers) 2001 ATC 4508; [2001] HCA 44; (2001) 207 CLR 21 is the modern restatement of the law concerning the distinction between independent contractors and employees. Although the case was conducted on the footing whether or not a principal contractor could be vicariously liable for the torts committed by an independent contractor, Hollis is the authoritative statement of the law concerning the nature of employment and the use of labels such as ``employee'' and ``independent contractors'' as markers of significant legal relationships. As the majority said in Hollis in a joint decision at ATC 4517 [36]; HCA [36]: ``[t]erms such as `employee' and `independent contractor', and the dichotomy which is seen as existing between them, do not necessarily display their legal content purely by virtue of their semantic meaning''. Even before Hollis was decided, the classic tests for assessing the totality of the relationship and determining if someone is an employee of an employer included:

• (1) the employer's power of selection of his or her worker;
• (2) the payment of wages or other remuneration;
• (3) the employer's right to control the method of doing the work; and
• (4) the employer's right of suspension or dismissal: Short v J & W Henderson Ltd [1946] SC(HL) 24 at 33-34: see Hollis at ATC 4523 [68]; HCA [68] per McHugh J (in a separate majority decision).

In Hollis, McHugh J referred to independent contractors as those persons who act as independent principals, exercising an independent discretion in carrying out a task for their own business interests and who are retained simply to produce a result (at ATC 4523 [68]; HCA [68]).

41. It is possible to read the joint majority decision of the High Court in Hollis as favouring a test to differentiate employees from independent contractors that pivots around the fulcrum of whether or not the supposed independent contractor is economically and functionally a unit of the business enterprise conducted by the principal/employer. Thus the traditional test of the right to exercise control as an indicator of the employment relationship is pressed into service for a different purpose than it has been traditionally.

42. It is the Applicant's case that it is in fact retained simply to produce a result. The contention of the Respondent, pared to its essence, was that the computer consultancy services supplied by the Applicant in the form of the services actually supplied by Mr Gluch were not the actions of an independent supplier of services and that viewed in its totality and reality, the Applicant was economically integrated into the enterprise of Campbell Brothers Ltd.

43. In this case, the Tribunal considers that the following factual elements are decisive:

• (a) the Applicant is paid monthly in arrears according to services supplied by it to its only client;
• (b) the Applicant is paid periodically according to time spent on projects for which it is engaged by its only client;
• (c) the Applicant had only one client during the year of income;
• (d) the Applicant's only client reimburses it for out-of-pocket expenses (such as travel, meals, accommodation and car parking expenses);
• (e) the arrangement between the Applicant and Campbell Brothers Ltd is enduring and ongoing;

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  ATC 2289

• (f) the Applicant cannot delegate to a third party any of the services to be provided to Campbell Brothers Ltd without the consent of a proper officer of Campbell Brothers Ltd. Adapting what McHugh J said in Hollis (at ATC 4523 [68]; HCA [68]), the Applicant does not possess an independent discretion in carrying out a task for its own business interests and is not retained simply to produce a result;
• (g) the Applicant moved seamlessly from one project to another.

44. Taking into account the individual and aggregate effect of these elements, the Tribunal has formed the opinion that the Applicant is paid in arrears for labour supplied by it to its only client on a month by month basis and not to produce a result. Accordingly, the Tribunal is of the opinion that the Applicant does not satisfy the results test in section 87-18(3)(a).

45. In view of the finding of the Tribunal that the Applicant does not satisfy the results test in section 87-18(3)(a), the Tribunal is not required to consider the successive elements of the results test contained in sections 87-18(3)(b) and (c) as these three elements are cumulative and not alternatives. If the Tribunal, is wrong in its application of the production of the result element in section 87-18(3)(a), then the Tribunal would need to consider the successive elements within sections 87-18(3)(b) and (c), which the Tribunal proceeded to do.

46. In connection with sections 87-18(3)(b), the Applicant argued that it was required to supply its own equipment (computing hardware and software). The Respondent argued that in relation to section 87-18(3)(b), the Applicant was not required contractually to supply the equipment needed to perform the work from which the Applicant produces the result. The argument of the Respondent was that the Applicants had to be obligated or required contractually to provide the necessary equipment to undertake the task at hand. In the opinion of the Tribunal, the contention of the Respondent concerning the source of a requirement to supply equipment is too narrow. A contractual requirement to supply equipment is a sufficient but not necessary source of the statutory requirement. In other words, if there is no contractual requirement of the Applicant to supply its own equipment, then this does not mean that there is no such requirement at all. The Tribunal has found as a fact that the contractual arrangement between the Applicant and Campbell Brothers Ltd did in fact require the Applicant to provide its own equipment (computing hardware and software) for the purpose of performing projects undertaken with Campbell Brothers Ltd.

47. The evidence before the Tribunal establishes that in relation to section 87-18(3)(b), the Applicant is required to supply the equipment needed to perform the work from which the Applicant produces the result, and in fact does so, supplying its own hardware and software to supply the computing consultancy services. The Tribunal is satisfied that the requirements of section 87-18(3)(b) have been met by the Applicant in this case.

48. In connection with section 87-18(3)(c) (the personal services entity is, or would be, liable for the cost of rectifying any defect in the work performed), the evidence before the Tribunal establishes in the form of the correspondence from Campbell Brothers Ltd recording the terms of the contractual arrangements between it and the Applicant that the Applicant carries the commercial risk if there are any cost overruns on a given project, then the Applicant cannot under normal circumstances invoice Campbell Brothers Ltd for those overruns. The evidence of Mr Gluch to the Tribunal, which was not seriously challenged by the responded in cross- examination, was that he would remedy any elements of those projects that required this in the course of execution of the project, and that he had never been called upon by Campbell Brothers Ltd to rectify defective work after a project had been completed.

49. The use of the expression ``commercial risk'' is used by the Respondent in its Taxation Ruling TR 2001/8 at para 131 where it is used as a surrogate concept for the ``liability for the cost'' of rectifying defective work within section 87-18(3)(c) in these terms: ``the key underlying consideration is whether the individual or entity is exposed to commercial risk in terms of a liability to cover the cost of rectifying defective work''. The Tribunal is not persuaded that ``commercial risk'' is an adequate or complete surrogate for the statutory concept of a liability to rectify defective work. The Tribunal noted that the assumption or imposition of a duty to perform work in a satisfactory manner is a prior stage to a liability to rectify any such defective work if that duty is

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ATC 2290

breached. Nevertheless the Tribunal accepted that in this case the Applicant is subject to the potential or contingent liability to rectify defective work. Perhaps the ``commercial risk'' criterion expresses in an indirect or oblique manner the prospect that responsibility for any defective work performed will be sheeted home to the service supplier, and in this in this sense for the Tribunal understood the commercial risk criterion.

50. The evidence before the Tribunal establishes that in relation to section 87-18(3)(c), the Applicant is, or would be, liable for the cost of rectifying any defect in the work performed. The Applicant carries the commercial risk that if there are any cost overruns on a given project, it cannot under normal circumstances invoice Campbell Brothers Ltd for those overruns. The Tribunal was satisfied on the basis of the evidence before it that the Applicant has met the criterion for defect remediation contained within section 87-18(3)(c).

51. The Tribunal considered that under section 87-18(4), regard is to be had whether it is the custom or practice, when work of the kind in question is performed by an entity other than an employee produces any of the three outcomes mentioned in paragraphs (a)-(c) of that provision. The Tribunal noted that neither party lead any evidence about any industry custom or practice of the kind mentioned in section 87-18(4). Accordingly, the Tribunal was unable to follow the signpost marked out by section 87-18(4).

52. The Tribunal noted that under section 87-65(3), the Respondent must not make the personal services business determination unless the Respondent is satisfied that, in the income year during which the determination first has effect, or is taken to have first had effect, the conditions in one or more of sections 87-65(3A), (3B), (5) and (6) are met. In this case, the only one of these conditions that is potentially relevant is one mentioned in section 87-65(3B). Section 87-65(3B) states that but for unusual circumstances applying to the entity in that year, the entity could reasonably have been expected to meet, or would have met, the results test under section 87-18, the employment test under section 87-25, the business premises test under section 87-30 or more than one of those tests, and the individual's personal services income included in the entity's ordinary income or statutory income could reasonably be expected to be, or was, from the entity conducting activities that met one or more of those tests. It was not argued by the Applicant that unusual circumstances (as to which see
Creaton Pty Ltd v FC of T 2002 ATC 2216 at 2224-2225 [28-38]; [2002] AATA 1121, paras 28-38) existed in this case which might justify the Respondent making a personal services business determination outside of the ordinary circumstances posited by the normal operation of the four personal service business tests signposted by section 87-15(2). Based upon the evidence before it, the Tribunal was not satisfied that unusual circumstances existed to justify the making of a personal services business determination.

53. For the sake of completeness, the Tribunal considers that the evidence before it well justified the conclusion that the Applicant did not satisfy the unrelated clients test under section 87-20, nor the employment test under section 87-25, nor the business premises test under section 87-30. The Tribunal noted that the Applicant did not argue that it satisfied any of these three alternative tests.

54. The Tribunal noted that this case is not one of those cases where the Respondent has applied the provisions of Part IVA of the Income Tax Assessment Act 1936 to income that has been diverted or alienated by the Applicant through an associated person who is in a dominant or controlling position in relation to the Applicant (one such example is
Egan v FC of T 2001 ATC 2185; [2001] AATA 449). The Tribunal noted that the Applicant was incorporated on 21 July 1980, which predates both the commencement of Part IVA and Part 2-42 of the ITAA 1997, so it cannot be said that the Applicant was incorporated for the express purpose of facilitating a Part IVA scheme.

Tribunal's conclusion

55. Accordingly, the Tribunal decides that the decision of the Respondent to disallow the Applicant's objection against the Respondent's refusal to make a personal business services determination was correct in the circumstances of this case. For these Reasons, the Tribunal affirms the decision under review.