ATO ID 2002/803: Alienation of Personal Services Income - Results test
Date of decision: 21 February 2002
Year of income: Year ending 30 June 2002
Business line: Small Business/Individual Taxpayers

Issue
Does the taxpayer satisfy the results test contained in section 87-18 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision
No. The taxpayer does not satisfy the results test in section 87-18 of the ITAA 1997.

Facts
The taxpayer is a company with two shareholders. Both shareholders and an unrelated third party are employees of the taxpayer. The taxpayer pays each employee an annual salary in monthly instalments. The taxpayer has contracted to supply the three employees to a licensed dealer in securities ('the Dealer'). In turn the individuals have been appointed as proper authority holders ('PAH') under subsection 94(2) of the then Corporations Act 1989 . Under the contract the taxpayer receives commissions determined by reference to corporate advisory transactions as well as equity and derivatives business written by the individuals for the Dealer. The three individuals perform the usual functions of a PAH for the Dealer. Contractually, the functions are performed in each individual's personal capacity for the Dealer and not as an employee of the taxpayer. The individuals are not entitled to any remuneration from the Dealer. The taxpayer is not itself involved in advising clients or dealing in securities.

Reasons for decision
Summary: The results test is set down in section 87-18 of the ITAA 1997. Subsection (3) deals with personal services entities and provides as follows: (3) A *personal services entity meets the result 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. The taxpayer merely supplies the individuals to the Dealer and does nothing else. That is, the arrangement is for the hire of the individuals to the Dealer. The first condition of the results test requires the personal services income be from producing a result. The meaning of 'producing a result' is explained in Taxation Ruling TR 2001/8 to be inter alia , a contract to achieve a specified outcome. In essence, for a contract to be for producing a result, there must be some task required where it is left to the performing party to determine who and how the task is to be performed. Entitlement to payment in turn must be tied to completing the task. The contract between the taxpayer and the Dealer merely contemplates the supply (or hire) of the individuals. A contract for hire is not a contract for producing a result within the case law meaning or the meaning explained in TR 2001/8. Under a contract for hire, there is nothing created or produced by the supplying party. There is simply the provision of a pre-existing asset (in this case human capital). As the first condition of the results test is not satisfied it is unnecessary to consider the other conditions. All three conditions must be satisfied to meet the results test.

Legislative references: Income Tax Assessment Act 1997 section 87-18 subsection 87-18(3)
Related public rulings and determinations: Taxation Ruling TR 2001/7 | Taxation Ruling TR 2001/8
Related ATO interpretative decisions: ATO ID 2002/802 | ATO ID 2002/804 | ATO ID 2002/805
Subject references: Alienation of personal services income Assessable income of a personal services entity Personal services income PSBD results test