Private ruling: Personal services income and personal services business
Date of advice: 18 January 2022
Published: April 2022
Ruling period: Income year ended 30 June 20XX | Question 2 | Was the results test met in relation to the PSI of XXX in the 20XX income year? | Answer | Yes. | Question 3 | Did the company conduct a personal services business in the 20XX income year? | Answer | Yes.
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the income received by the company for medical services provided by XXX their personal services income (PSI)? | A1: Yes.

Relevant facts and circumstances: XXX is the sole director of Y. The company contracted with two separate entities for the provision of premises, radiology machinery, associated plant and equipment, staff and technicians required by the company to carry on its business. XXX is a specialist medical practitioner who works as a radiologist producing diagnostic reports. They conduct their work each week from a number of premises made available by A and B pursuant to the respective Service Agreements. The contractual arrangements between the company and XXX and A and B as follows: • Each provides the company and XXX with all of the required equipment needed to undertake and provide the medical imaging services supplied by the company. • Each engages the supporting staff required to provide these services, on behalf of the company, including radiographers, sonographers, secretaries, medical transcriptionists, cleaners and IT professionals, each of whom assist XXX in performing the radiology work in capturing and assessing the medical imaging and producing the radiology report. • Each acts as an agent for the company and XXX to invoice and collect payment for the services provided (gross billings). For the reports produced by XXX, invoices are issued to the relevant patient/party using XXX Medicare provider number. • The gross billings are paid into a bank account controlled by A and B, respectively, and the company is charged a fee for the provision of the respective premises, radiology machinery, tools and equipment and support staff (Services Fee). Both A and B (service providers) charge a Service Fee of 80% of XXX gross billings for a relevant period, plus GST. Pursuant to the Service Agreements for each invoice period, the service provider produces an invoice to the company for the services performed and facilities provided in that period, and after withholding an amount equal to the relevant Service Fee plus GST, remits the balance of gross billings derived by the company for that period to the company. Copies of the following Services Agreements were provided: • Facilities and Services Agreement between Y and A - Service Fee of 80% of gross billings • Facilities and Services Agreement between Y and B - Service Fee of 80% of gross billings The Services Agreements provide for facilities, services and items such as administrative services, clerical staff and/or other clinical staff, plant and equipment maintenance, repair, cleaning and keeping in good order and condition of the space within the premises and of all equipment, plant, apparatus, instruments, fittings, furniture and furnishings used at the premises. The company provides the requisite plant and equipment, including X-ray machines, CT scanners, fluoroscopy machines, digital subtraction angiogram machines, MRI machines, ultrasound machines and purpose-built specifically designed radiologist safety computer work stations to enable XXX to produce the diagnostic reports. The company does not directly own this plant and equipment, but rather leases/hires it from A and B. Procurement of the plant and equipment and associated tools constitutes a significant cost of the company's business. Without that plant and equipment XXX is unable to conduct their radiology services on behalf of the company. XXX holds the appropriate professional indemnity insurance which is required by the medical profession.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 84-5 | Income Tax Assessment Act 1997 Section 87-18 | Income Tax Assessment Act 1936 Part IVA

Reasons for decision: Summary: The income received for the provision of medical services is mainly a reward for XXX personal efforts and skills and is therefore their PSI. | Detailed Reasoning - Personal services income (PSI): PSI is income that is mainly a reward for an individual's personal efforts or skills (or would mainly be such a reward if it was the income of the individual). By definition, income earned by an employee is PSI. However, the PSI rules do not apply to income received as an employee unless they are an employee of an interposed entity. Income that is mainly generated from: • the sale or supply of goods; • the supply and use of income-producing assets; or • a business structure is not PSI. Only individuals can have PSI. PSI can be earned directly by an individual or indirectly through a company, partnership or trust (personal services entity). 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 phrase 'or would mainly be such a reward if it was the income of the individual' applies to situations where the income is legally derived by a PSE and not the individual. If the PSE fails to meet a personal services business test in respect of a test individual, the PSI is deemed to be the income of the individual who earns the PSI and is attributed to that individual. The use of the word 'mainly' means that the income referred to needs to be 'chiefly', 'principally' or 'primarily' a reward for the provision of the personal efforts of, or for the exercise of the skills of, an individual. That is, more than half (50%) of the ordinary or statutory income received is required to be a reward for the personal efforts and skills of an individual rather than being generated by the use of assets, the sale of goods or by a business structure. XXX provides medical services as a radiologist on behalf of the company. The income received by the company for medical services is mainly a reward for XXX personal efforts and skills and is therefore their PSI. | Detailed Reasoning - Question 2: Was the results test met in relation to the PSI of XXX in the 20XX income year? | Summary: The results test was met in the 20XX income year, as at least 75% of the income received from XXX providing medical services met all three conditions of the results test. | Detailed Reasoning - The results test: To meet the results test in an income year at least 75% of an individual's PSI in an income year must satisfy all three conditions below: • the income is for producing a result; and • the individual or PSE is required to supply the plant and equipment and tools of trade needed to perform the work which produces the result; and • the individual or PSE is liable for the cost of rectifying defects. To meet the test all three conditions must be satisfied in relation to 75% of the PSI received. | Detailed Reasoning - 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. Required to supply the plant and equipment, or tools of trade, needed to perform the work 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. | Detailed Reasoning - 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. The existence of a term in an agreement that the individual or personal services entity is liable for the cost of rectifying any defect in the work performed would support the conclusion that liability to make good any faulty workmanship exists, particularly where the individual or PSE and the service acquirer are dealing with each other at arm's length. However, the term in the agreement should not be merely 'window dressing', and regard may be had to all the circumstances of the case in determining whether the relevant liability really exists. A requirement to have indemnity insurance is an indicator that an individual or PSE is liable for rectification where the indemnity insurance is part of the contractual arrangements between the parties. The three conditions of the results test are met in relation to 75% of the PSI of XXX. Payments received by the company for specialist medical services provided by XXX are for producing a result. That is, payment is contingent on services being provided after consultation with each patient. Under each service agreement, services are provided to the patient by XXX. Medicare is then billed and once payment is received from Medicare, the gross billings are paid into a bank account controlled by A and B, who retain 80% as a services fee under the service agreements for the provision of facilities, radiology machinery, tools and equipment, technicians and supporting staff, and associated services as required. The remaining 20% of gross billings is paid to the company. The company provides the tools and equipment required to do the actual work which produces the result, by leasing from A and B, X-ray machines, CT scanners, fluoroscopy machines, digital subtraction angiogram machines, MRI machines, ultrasound machines and purpose-built specifically designed radiologist safety computer work stations for XXX to produce diagnostic reports for patients. As the equipment is large, expensive and immobile, it is customary in this industry for entities providing radiology services and diagnostic reports to lease, rather than directly own, the requisite plant and equipment. XXX holds the appropriate professional indemnity insurance which is required by the medical profession. This requirement for professional indemnity insurance evidences that at all times XXX remains liable for the costs of rectifying defects in the work they performs. | Detailed Reasoning - Question 3: Did the company conduct a personal services business in the 20XX income year? | Summary: The company conducted a personal service business in the 20XX income year, as the results test was met. | Detailed Reasoning - Detailed reasoning: The PSI rules will not apply and an individual or entity will be conducting a personal services business if one of the four personal services business tests is met in an income year. Because the results test was met, the PSI rules do not apply, as the personal services income of XXX is from the company conducting a personal services business.