Personal Services Income Test Case
Thursday, 6 April 2006
In a recent case, the Administrative Appeals Tribunal (AAT) has found that an IT consulting services company did not satisfy the ‘personal services business’ test and, as such, the company’s income was assessable income for each of the individual contractors.
The taxpayer established a company to provide IT consulting services and technicians. The company’s four technicians were contracted to external entities to work on a full-time basis. For the income years ended 30 June 2002 and 30 June 2003, the company derived total fee income of almost $1 As the result of an audit in 2004, the Tax Office declared that the company was not a personal services business, as it did not pass any of the personal services business tests.
The Tax Office subsequently reassessed the company’s fee income for each of the company’s four technicians. The personal services income (PSI) tests are designed to prevent individuals from alienating income generated from personal services through another entity.
In order to be outside the PSI measures, a company can satisfy certain tests as outlined below:
Results test
A contract is measured by an outcome or product and the contractor is liable to rectify any problems; or
Unrelated clients test you derive income from two or more unrelated clients and advertise available services; or ƒ
Employment test
You engage an individual(s) to perform 20% or more of the principal work; or
Employment test
You engage an individual(s) to perform 20% or more of the principal work; or
Business premises test
You exclusively use business premises that are physically separate from your home, or from the premises of the person for whom you are working.
The AAT held that the relevant service contracts did not pass the results test as they were more in line with employment contracts, as each technician was paid an hourly rate and there was no contracted result or outcome. None of the remaining three tests could be satisfied as each consultant derived 100% of their income from one source, thus not satisfying the 80% requirement. Consequently, the AAT affirmed the Tax Office’s amended assessments and the taxpayer’s appeal was dismissed.
Lorne Lee is Managing Director of contractor management company ITG
Lorne Lee (LLee@myitg.com)
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Bye bye umbrella company'sFinally, these shonky tax minimisation corp's are dead. Their sole purpose was to get around the PSI and, well, they're f$%ked. Doesn't really pay to be a contractor anymore. UnemployedITer, 04/05/2006 11:30:31 AM
Must be that time of morning...UnemployedITer I can't seriously believe you posted that!! This is just an ad for ITG's services (as an umbrella company), since they'll claim to be able guide you you around the PSI rules. Simply click their website, they are one. BTW, there are those that can legitimately benefit from umbrella companies... what's your beef? Me, 04/05/2006 07:23:53 PM
Not a paid ad"This is just an ad for ITG's services" Just to clear things up, I haven't been paid anything for this post. It's obviously of interest to contractors, which is why I put it up. PK, 04/05/2006 08:01:10 PM
persecutionThe Aust govt has targeted and persecuted IT contractors over many years. We are an easy target with no powerful lobby group. I remember the exemptions the couriers were able to get from the PSI legislation because they had the TWU behind them. If this was a plumbing company the issue would not have arisen at all. Next we'll hear cries of IT skills shortages - it will be no surprise when this eventuates. rob, 04/05/2006 08:30:41 PM
Another exempt groupThey also granted an exemption to Financial Advisers and Mortgage Brokers. They effectively get paid through Product or Loan aggregators and so they fail the 80/20 test, yet they were able to obtain an exemption. Ranier Wolfcastle, 04/05/2006 10:13:09 PM
what were they thinking?How hard is it to pass the Unrelated clients test? >>Unrelated clients test >>you derive income from two or more unrelated clients and >>advertise available services; or Just whack up a web site offering your services and find another client to do a few hours work for ... Brian, 04/06/2006 12:28:16 AM
PSII have already discussed the PSI issue with the ATO, and with some careful clauses in your contract most of the issues can be dealt with providing you are not engaging via a labour-hire outfit. One of the things we discussed was the usage of tools. For the software developer the tools are usually the IDE and the workstation. If installed my development tools on the clients site, then this would be breaching my license agreement, wouldn't I? It would also be impractical to provide my own machine. I would need to use this at my home office (note - its a home based business) to service other contracts and projects - including r&d. There is also nowhere for us (contractors with private companies) to advertise. I have tried many times, including yellow pages, but there has never been any return on investment and they complain that they can't find us. LOL Hawkwind, 04/06/2006 12:44:24 AM
More details pleaseThere's something a bit fishy about the claim... "In a recent case, the Administrative Appeals Tribunal (AAT) has found that an IT consulting services company did not satisfy the ‘personal services business’ test and, as such, the company’s income was assessable income for each of the individual contractors." and the rest of this article. Who was the contractor? What was the date and other details? Can Mr Lee please provide more evidence that this event actually took place? If not, I think this can be dismissed as an invented scare campaign. Max, 04/06/2006 01:48:52 AM
ObfuscationWhat these people probably havn't told you are the following: 1. The tests have the potential to place financial penalties on a number of genuine independent contractors. 2. Our businesses are structured for legitimate business reasons and the provision has the potential to make us uncompetitive in the marketplace. 3. There is a fourth test, which is not available to use on a self-assessment basis and only available to a business which crosss the 80% threshold. 4. Those who receive more than 80% of their personal services income from a single entity must seek a Personal Services Business Determination from the Commissioner of Taxation. 5. The Commissioner must apply the 3 tests used in self assessment as well as the additional 4th test. 6. The test requires: The individual’s personal services income is for producing a result; and The individual is required to supply plant and equipment or tools of trade, needed to perform the work; and The individual is liable for the cost of rectifying any defects in the work. In making a determination in reliance on this fourth test, the Commissioner is able to have regard to industry custom and practice. Hawkwind, 04/06/2006 02:03:41 AM
to: MaxI can't find anything either. Usually their decisions are listed Here or Here Hawkwind, 04/06/2006 02:15:34 AM
The UnemployedITerAfter that post I think the UnemployerITer needs a wake up call. Can't get a job for so long in IT? Yes, it sux but them's the breaks so just move on to something else. If I were unemployed this long that's what I'd be doing. Life is more enjoyable without bitching about stuff you just can't change. Kriz Kriz, 04/06/2006 09:47:28 AM
Found the originalLooks like the original post was taken from here Jason, 05/29/2006 08:43:31 AM
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