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Edited version of private ruling
Authorisation Number: 1011599318721
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Ruling
Subject: Personal Services Business Results Test
1. Whether the income is personal services income according to subsection 84-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes.
2. Whether the rulee is considered to be a personal services business according to section 87-18 of the ITAA 1997?
Yes.
This ruling applies for the following period:
1 July 2008 to 30 June 2009
The scheme commences on:
1 July 2008
Relevant facts and circumstances
The rulee operates a business providing services. During the year the rulee provided services to contracting agents as well as being available to the general public.
The rulee owns very specific and expensive equipment which is used to operate the business. Without the specialised equipment the business would not capable of providing the service or generating business income. The rulee owns and maintains large, specialised equipment ranging from simple to more complex equipment. The rulee also provides a vehicle to transport the equipment.
The rulee is paid on a per job basis and hired to undertake specific tasks. The rulee can employee staff at any time without restrictions.
The rulee takes on liability for the works completed and as such maintains their own Professional Indemnity Insurance. Any errors or defective works require the rulee to undertake any rectification works at their own cost.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 84-5
Income Tax Assessment Act 1997 Section 87-18.
Reasons for decision
Whether personal services income is derived
The measure contained in Divisions 84 to 87 of the Income Tax Assessment Act 1997 (ITAA 1997) only applies if a taxpayer has income that is personal services income (of an individual). The definition of personal services income is contained in subsection 84-5(1) of the ITAA 1997 which states:
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).
The definition refers to income (including ordinary income or statutory income of any entity) that is mainly a reward for an individual's personal efforts or skills. Subsection 84-5(3) of the ITAA 1997 extends the definition of personal services income to income that is for doing work or for producing a result. The result must be produced from the individual's personal efforts or skills.
The fact that the income is payable under a contract does not stop the income being mainly a reward for an individual's personal efforts or skills (subsection 84-5(4) of the ITAA 1997).
Consequently, the income received for surveying is mainly a reward for personal efforts or skills and is therefore personal services income.
Whether the results test is met for a personal services business
The results test as specified in subsection 87-18(3) of the ITAA 1997 provides:
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 entities 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.
In considering the results test, regard must be had to the custom or practice as specified in subsection 87-18(4) of the ITAA which states:
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; an
(c) for the entity to be liable for the cost of rectifying any defect in the work performed;
as the case requires.
The income is for producing a result
To satisfy the first condition for the results test the personal services income must be for producing a result. The phrase producing a result means the performance of a service by one party for another where the first-mentioned party is free to employ his/her own means (that is, third party labour, plant and equipment and so on) to achieve the contractually specified outcome. The essence of the contract has to be to achieve a result and not to do work.
The consideration often is a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked.
The Explanatory Memorandum to the Alienation of Personal Services Income Act 2000 provides:
The individual must actually be paid on the basis of achieving a result, rather than for example, for hours worked. (paragraph 1.114)
In the rulee's case, payment is made on completion of a particular job and therefore on the basis of achieving a particular result. In addition, the rulee is free to employ its own means to achieve the specified outcome such as employing staff.
Accordingly, the rulee satisfies paragraph 87-18(3)(a) of the ITAA 1997.
Required to supply the plant and equipment, or tools of trade, needed to perform the work which produces the result
The second condition for the results test is that the individual or the personal services entity is required to supply the plant and equipment or tools of trade, needed to perform the work that produces the result.
Having regard to the custom and practice in relation to particular work there may be an expectation that a genuine independent contractor would be required to supply the plant and equipment or tools of trade necessary to perform the work. Where such an expectation exists, or where the contractual arrangements require the supply of necessary equipment or tools, such equipment or tools have to be supplied in order to meet the results test.
The rulee owns and maintains large, specialised equipment valued ranging from simple to more complex equipment. Due to its size, the rulee's equipment must be transported from site to site using a vehicle provided by the rulee.
The rulee's equipment is integral to the work and is therefore needed to perform the work that produces the result. Accordingly, paragraph 87-18(3)(b) of the ITAA 1997 is satisfied.
Liable for the cost of rectifying any defect in the work performed
The third condition for the results test requires that the individual or the personal services entity is or would be liable for the cost of rectifying any defect in the work performed.
The emphasis here is on liability for the cost of rectifying faulty work. That is, 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. This is consistent with the focus on the chance of profit and the risk of loss as a traditional indicator that a taxpayer is an independent contractor conducting their own business.
The rulee takes on liability for the works completed and as such maintains their own Professional Indemnity Insurance. Any errors or defective works require the rulee to undertake any rectification works at their own cost.
The rulee therefore meets the requirements of paragraph 87-18(3)(c) of the ITAA 1997.
Summary
As all the conditions in paragraphs 87-18(3)(a)-(c) of the ITAA 1997 are satisfied the rulee is considered to be a personal services business having met the results test.