Edited version of private advice

Authorisation Number: 1052230972699

Date of advice: 17 June 2024

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 period

30 June 20XX

The scheme commenced on:

21 February 20XX

Relevant facts and circumstances

You are a medical practitioner.

You entered into a Services and Facilities Agreement (Services Agreement) on a specified date with Company A.

You provide specified clinical services and non-clinical services as a medical practitioner.

You are paid per consultation with patients and in some instances, per report for insurance purposes. Where care plans are incorporated into a patient consultation, this is paid for by the patient or the Government under the bulk billing provisions. Company A, appointed as your agent, provides daily billing and receives gross receipts into the trust account maintained on your behalf. From the gross receipts Company A pays the services fee under the agreement and transfers the balance of the gross receipts net of their services fee to you on a fortnightly basis.

You have provided a signed copy of the Services Agreement between yourself and Company A to provide your medical services to the public at the premises operated by Company A located at a specified address (the Premises).

Under the Services Agreement with Company A:

•         You are a registered medical practitioner.

•         Company A is to provide administrative services, various facilities and amenities including Company A's medical software, equipment, instruments and consumables to enable you to conduct your medical practice from the Premises.

•         You will pay Company A an amount equal to a percentage of your weekly gross receipts (Services Fee) for access to the Premises and services provided to you by Company A under this agreement. Company A will invoice you the Services Fee plus GST on a fortnightly basis.

•         Company A will remit to you an amount equal to the gross receipts less the Serviced Fee for that invoicing period.

•         You are liable to indemnify and agree to keep Company A indemnified for all claims or liabilities arising from you rendering medical services.

•         You are required to have adequate professional medical indemnity insurance. You are also required to have public liability insurance for an amount not less than $XX million.

The commencement date of the Services Agreement is a specified date and the minimum term is one year. At any time after the end of the minimum term, the agreement may be terminated by either party giving 4 weeks' written notice.

You provided a Schedule of Fees which sets out the percentage paid.

You have provided a copy of the registration certificate with the Australian Health Practitioner Regulation Agency (AHPRA).

You have provided evidence of your professional indemnity insurance policy.

You incorporated Company B on a specified date. From the period 1 July 20XX, you wish to interpose Company B between yourself and Company A.

Company B will be the party to the services agreement with Company A. The Services and Facilities Agreement will be on substantially the same terms and conditions as the current contract and will be entered into by Company B. Company B will receive all the income from the medical practice.

Assumptions

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

•         Your services will be provided under the contracts between your Company B 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

Further issues for you to consider

We have limited our private ruling to the questions raised in your application. There may be related issues that you should consider, including:

•         Whether payments to an associate are made, and

•         How salary or wage plus superannuation contribution to you from the incorporated company.

You may apply for another private ruling on these or any other matters.

Reasons for decision

Question 1

Summary

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 2022/3 Income Tax: personal services income and personal services business goes on to say that PSI income does not include income that is generated by the use of assets, the supply or sale of goods, or by 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 as a medical practitioner, either directly through you as a sole trader or via an interposed entity are services that require your personal skills and expertise as a medical practitioner. 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 results test

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

Subsection 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 (i.e. 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.

Applying the law to your circumstances

Producing a result

You have advised that you are paid per consultation with patients and in some cases, per report for insurance purposes. Therefore, payments you received for providing your medical services at Company A's premises are for producing a result. Accordingly, the first condition of the results test is met.

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

The Services Agreement indicates that you are charged Services Fee by Company A for access to the Premises and the services provided to you under this agreement which includes, among other things, the use of Company A's medical software, the use of equipment, instrument and consumables maintained on the Premises. As there is a cost to you (incorporated in the Services Fee) for the equipment or tools of the trade needed to do the work, the Commissioner considers that these items are being provided by you and therefore the second condition of the results test is met.

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

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

'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 have met the three conditions under the results test; therefore, you have passed the results test under section 87-18 of the 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 met?

Summary

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

Detailed reasoning

Subsection 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.

Subsection 87-18(3) expresses a similar test in subsection 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 2022/3 Income tax: personal services income and 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.

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

Applying 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.

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.