Personal service income and the results test – Beware!
During the 2011/12 income year, the taxpayer company (the company) entered into three agreements with BSI Contracting Pty Ltd (BSI) under which the company would provide its only director (Mr Prasad) to perform certain project management services to ASIC.
In each contract, Mr Prasad was named as the Key Person, and his role was described as project manager. Basically no other person could perform that role which had to be performed at ASIC’s Sydney office. Under the contracts, BSI was to pay the company a fee of $1,000 per day (worked by Mr Prasad) plus GST on a fortnightly basis.
After the first two weeks of the contract, BSI was required to give the company four weeks’ notice in the event BSI decided to terminate the arrangement.
On 7 May 2013, the taxpayer company lodged an application under S.87-70(1)(a) of the ITAA 1997 in which he sought a personal services business determination (PSBD) on the basis of the results test with respect to the 2012 income year.
The ATO rejected the PSBD application on 5 June 2013, on the basis that the company failed to meet the results test as provided for by S87-18(3) because:
(a) Mr Prasad’s income was not for producing a result (S.87-18(3)(a));
(b) the company was not required to supply plant and equipment or tools of trade needed to perform the work from which it produced the purported result (S87-18(3)(b));
(c) the company was not, and would not be, liable for the cost of rectifying any defect in the work performed (S.87-18(3)(c)).
Although the taxpayer company argued that:
- the agreements were to produce deliverables in respect of three projects, each with their own beginning and end dates; and
- the total cost factored in the setting of a daily rate and length of term of each agreement;
the tribunal found otherwise.
- no contingency based fee that would vary depending on the success of failure of the projects involved;
- no specified deliverables or milestones; and crucially
- while the work carried out by Mr Prasad was directed towards the production of a result, the entitlement to receive income was not dependent upon his producing that result.
Taxpayers should note that the results test is a pretty hard barrier to overcome. Therefore, if you need help in that regard, why not contact one of our tax lawyers or tax accountants at The Quinn Group on (02) 9223 9166 or submit an online enquiry.