Private ruling: Personal services income
Published: June 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Question and answer | For the purposes of the personal services income provisions of the Income Tax Assessment Act 1997 , do you meet the results test? | Yes.

Relevant facts and circumstances: Dr X provides medical services on behalf of you. Dr X is your sole shareholder and director. Dr X provides their own bag of equipment including items such as a stethoscope, and additional tools and equipment necessary are supplied by the hospitals where the operation is taking place. You have professional medical indemnity insurance for the services provided. The income you derive for providing these services is personal services income (PSI). You do not derive any other source of PSI. You invoice your clients based on the specific type of service you provide for each client.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 84-5 | Income Tax Assessment Act 1997 Section 87-15 | Income Tax Assessment Act 1997 Section 87-18

Reasons for decision: Summary: The measures contained in Divisions 84 to 87 of the Income Tax Assessment Act 1997 (ITAA 1997) only apply if a taxpayer has income that is personal services income (of an individual). 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. Income from personal services is attributed to the individual (unless the income is promptly paid to the individual as salary) under the personal services income legislation unless one or more of the four personal services income tests is passed. The four tests are: • The results test • The unrelated clients test • The employment test • The business premises test | Detailed Reasoning - The results test: 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 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. In considering the results test, regard must be had to the custom or practice as specified in subsection 87-18(4) of the ITAA 1997 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; and (c) for the entity to be liable for the cost of rectifying any defect in the work performed; as the case requires. The totality of the relationship between the parties will be relevant as to whether the contract is properly to be construed as one for the production of a result. Producing a result To satisfy the first condition of the results test the personal services income must be for producing a result. The meaning of 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 (i.e., third party labour, plant and equipment etc.) to achieve the contractually specified outcome. The essence of the contract has to be to achieve a result and not to do work. In your case, you provide specific types of services to your clients and bill your clients based on the specific services provided. It is concluded, therefore, that the essence of your contracts with your clients is to achieve a result and not to do work. Required to supply the plant and equipment, or tools of trade, needed to perform the work 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'. In your case, Dr X provides their own bag of equipment including items such as a stethoscope, and additional tools and equipment necessary are supplied by the hospitals where the operation is taking place. It is accepted that it is normal practice for a hospital to provide tools and equipment to medical specialists. It is concluded, therefore, that you meet this condition. 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. In your case, you have professional medical indemnity insurance for the services provided. It is concluded, therefore, that you meet this condition. | Summary: As you meet all three of the above conditions, you therefore satisfy the results test. As you satisfy this test, there is no need to consider the other tests.