Edited version of private advice

Authorisation Number: 1051965794002

Date of advice: 26 April 2022

Ruling

Subject: Personal services income

Question 1

Did you pass the results test under section 87-18 of the Income Tax Assessment Act 1997 (ITAA 1997) in the 20XX income year?

Answer

Yes. Based on the information you have provided to the Commissioner you satisfied the three conditions of the results test in relation to your personal services income.

Question 2

Will the provision of your services through a company structure under your new proposal affect whether the results test is met?

Answer

No. Incorporation of a company between you and the services acquirer does not affect whether you passed the results test under section 87-18 of ITAA 1997.

This ruling applies for the following periods:

30 June 20XX

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a sole trader, entered into a Service Agreement with Company A to provide general practice clinic as a medical general practitioner, and non-clinic services as a consultant. The commencement date of the Service Agreement was XX/XX/XXXX.

Under the Service Agreement with Company A:

•         You are a registered medical practitioner.

•         Company A is to provide various facilities and services such as administrative services, clerical staff, space on a location within their clinic, plant, equipment, and instruments which are necessary for you to conduct your medical practice from their clinic.

•         Company A will charge, and you agreed to pay Company A service fees. The service fee is calculated by reference to a percentage of one or more categories of Billing relating to Medical Services provided by you during a Billing Period.

•         Company A will remit to you an amount equal to the Billings less the services fees for that Billing Period.

•         You are liable for any claim, damage, loss, liability or cost of a third party arising from you rendering Medical Services.

•         The Service Agreement has no fixed term and can be terminated voluntarily by either party giving written notice to the other party without cause.

•         You are required to have medical indemnity insurance for liability of up to $20 million.

You received all your income from Company A for medical services you provided. More than XX% of the income for 20XX financial year were from non-clinical services based on the income breakdown spreadsheet you provided.

As a consultant, you provide independent medical examinations and provide reports and charged the fees at a set rate for every report.

You hold professional indemnity insurance and are contractually obliged to indemnify the other party from all liability of any kind which may arise.

You wish to incorporate a company (X-co) and interpose it between you and Company A.

When you incorporate X-co and interpose it between you and Company A

•         You will provide the services through X-co and you are the only one to provide the services.

•         The contracts with Company A will have the same terms and conditions as you currently do.

•         X-co will receive all income for your services from Company A.

Assumptions

Throughout the Ruling Period, it is assumed that under the new proposal:

•         Your services will be provided under the contracts between your incorporated company and Company A, which will have the same terms and conditions as you currently do.

•         You are the only person to provide the services via the incorporated company

Relevant legislative provisions

Income Tax Assessment Act 1997 section 84-5

Income Tax Assessment Act 1997 section 86-15

Income Tax Assessment Act 1997 section 87-15

Income Tax Assessment Act 1997 section 87-18

Reasons for decision

Question 1

Do you pass the results test under section 87-18 of the Income Tax Assessment Act 1997 (ITAA 1997) in the 20XX income year?

Summary

Yes. Based on the information you have provided to the Commissioner you satisfied the three conditions of the results test in relation to your personal services income.

Detailed reasoning

Personal services income (PSI)

Section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997) defines PSI as income that is mainly a reward for the personal efforts or skills of an individual. Taxation Ruling TR 2001/7 Income Tax: The meaning of personal services income goes on to say that PSI income does not include income that is generated by the use of assets, the sale of goods, the granting of a right to use property or a business structure.

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

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.

The services provided by you, either directly through you as a sole trader or via an interposed entity are services that require your personal skills and expertise. The income so derived will be PSI.

Personal services business (PSB)

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

The object of Division 87 of the ITAA 1997 is to define personal services businesses in a way that ensures that it covers genuine businesses but not situations that are merely arrangements for dealing with the personal services income of individuals.

Subsection 87-15(2) of the ITAA 1997 provides four personal services business tests, namely:

•         The results test

•         The unrelated clients test

•         The employment test, and

•         The business premises test.

Only one test is required to be met for the PSI rules not to apply.

The 80% rule

Individuals/PSEs can self-assess against the results test irrespective of how much income comes from one source. If less than 80% of the PSI is from one source, an individual/PSE can self-assess against the other tests. However, if more than 80% of the PSI is from one source, the individual/PSE must hold a Personal Services Business Determination (PSBD) from the Commissioner for the PSI rules not to apply to that income.

You advised that in the 20XX income year more than 80% of the PSI was from one source.

The results test

The results test is provided in section 87-18 of the ITAA 1997.

Section 87-18(1) states that an individual meets the results test in an income year if, in relation to at least 75% of the individual ' s personal services income for the income year, the individual satisfies all of the three conditions:

(1) the income is for producing a result

(2) 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

(3) the individual is, or would be, liable for the cost of rectifying any defect in the work performed.

All three conditions must be satisfied in relation to 75% of the PSI received in the income year.

Producing a result

In results-based contracts, payment is usually made for a negotiated contract price, as opposed to an hourly or daily rate, 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 remuneration is often a fixed sum on completion of a particular job as opposed to an amount paid by reference to hours worked.

The essence of the contract must be to achieve a result and not to do work. The fact that an individual 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.

A contract to 'produce a result' is one to produce a specified outcome or result and payment is based on performance of the contract (ie for producing the outcome or result).

Required to supply the plant and equipment, or tools of trade, needed to perform the work that produces the result

To satisfy the second condition, the individual or PSE must supply any plant and equipment, or tools of trade needed to do the actual work which produces the result and which a service acquirer would expect the individual or PSE to provide or which the individual or PSE is contractually required to provide.

There are situations where, having regard to the nature of the work, no plant or equipment or tools of trade are needed to perform the work. Where this is the case, this condition will be met.

Liable for the cost of rectifying any defect in the work performed

To satisfy the third condition, the individual or PSE must be liable for the cost of rectifying any defects in the work. There is no requirement that they actually perform the work which rectifies the defect so long as they pay for it. The main consideration is whether they are exposed to commercial risk.

Where physical rectification is not possible, the purpose of the provision would be satisfied where a right to claim for damages exists in respect of faulty or negligent performance of contractual obligations and the individual or PSE is, or would be, liable for the relevant component of damages awarded for the faulty or defective work.

Application to your situation

Producing a result

You are required to provide report within timeframe, and then received remitment from Company A after the service had been provided.

Required to supply the plant and equipment, or tools of trade, needed to perform the work that produces the result

You are charged a services fee which covers the costs for providing staff, equipment and using premises. As there is a cost to you (the service fee) for the plant and equipment or tools of trade needed to do the work, the Commissioner considers that these items are being provided by you and this element of the test is met.

Liable for the cost of rectifying any defect in the work performed

The appropriate medical indemnity insurance is required under the agreements and is maintained which evidences liability for rectification of defects in the services performed by you. You provided a copy of Certificate of Currency showing that you are covered by the professional indemnity insurance.

'75% requirement'

The results test requires at least 75% of the PSI meets all three conditions listed above.

Based on the information provided, at least 75% of the PSI received in the 20XX income year through Company A were from services that met all three conditions of the results test.

You met the three conditions under the results test, therefore you passed the results test under section 87-18 of ITAA 1997 for the 20XX income year.

Question 2

Will the provision of your services through a company structure under your new proposal affect whether the results test is passed?

Answer

No. The provision of your services through a company structure under your new proposal does not affect whether you passed the results test under section 87-18 of ITAA 1997

Detailed reasoning

Section 87-18(3) 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:

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

(2) 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

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

Section 87-18(3) expresses a similar test in section 87-18(1) mentioned earlier, albeit adapted to the situation where a personal services entity includes an individual's PSI in its ordinary income or statutory income. Taxation Ruling TR 2001/8 Income tax: what is a personal services business? provides further information and the Commissioners view of the results test for an individual and for a personal services entity. The three conditions in the tests are similar.

Application of the law to your circumstances

Where you provide personal services as an individual, the personal services income derived from the provision of these services is attributed to you as assessable income.

In circumstances where a personal services entity (e.g. a company) is interposed between you and the service acquirers, section 86-15(1) of the ITAA 1997 comes into operation, effectively ensuring that the income so derived through that entity remains your assessable income. Section 86-15(1) does not apply if that amount is income from the personal services entity conducting a personal services business.

The conditions of the results test for an individual under subsection 87-18(1) are similar to the conditions for results test for a personal services entity. Incorporation of a company between you and the service acquirers does not affect whether the results test is met under section 87-18 of ITAA 1997, as the result is the same in either case.

We have established in our analysis of Question 1 above, that you passed the results test under subsection 87-18(1) of ITAA 1997 in the 20XX income year. The same outcome would apply (for the same reasons) to an entity that was interposed between you and service acquirers under subsection 87-18(3) of ITAA 1997.

Conclusion

Incorporation of a company between you and the services acquirer does not affect whether you passed the results test under section 87-18 of ITAA 1997.

The results test is met if all the conditions under section 87-18 are satisfied, irrespective of whether you provide the services as a sole trader or through a company.