Contractors and Professionals Income: The results test
If you satisfy this test then you will or may be allowed to operate a business along with other family members or business associates.
You should contact one of the senior tax partners at FORSYTHS (contact emails on the right) to review your position and determine if you meet the strict interpretation of this test.
The results test is the first test to consider in determining whether a personal services business exists. An individual or personal services entity that satisfies the results test will be taken to be conducting a personal services business (s 87-15). The income from that business is therefore exempt from the personal services income regime.
The results test is based on the traditional criteria for distinguishing independent contractors from employees (Taxation Ruling TR 2005/16). An individual will satisfy the results test in a particular income year if, in relation to at least 75% of his or her personal services income during the year (excluding employee or office-holder income), the individual meets all of the following conditions.
1. The income is for producing a result (e.g. delivering a completed software component, as contrasted with performing a week of programming work working on an hourly rate). For instance, this does not include hiring staff to customers: Interpretative Decision ID 2002/803.
2. The individual is required to supply the plant and equipment or any tools of trade needed to do the work.
3. The individual is, or would be, liable for the cost of rectifying any defect in the work performed (s 87-18). Where physical rectification is not possible, condition (3) will be satisfied if the individual is liable for damages in relation to the defect (Taxation Ruling TR 2001/8).
For each of these conditions, industry custom and practice will be taken into account.
Corresponding conditions apply to a personal services entity, except that in condition (1) it is the personal services entity’s income from the individual’s personal services income that must be for producing a result.
Essentially if you are paid to produce a final result using your own equipment and being responsible to correct any mistakes at your own cost then you may meet these conditions.
Again talk to FORSYTHS first so you don’t make a costly error due to misunderstanding a complicated rule.
A courier company engages individual drivers to perform courier services. The company receives orders, then arranges for one of the couriers to do the delivery. The couriers provide their own vans with corporate fit-out and are paid a fee for each delivery. The couriers are liable for any damage and any incorrect deliveries.
The couriers satisfy the results test because: (1) they are paid for producing a result, i.e. successful delivery; (2) they are required to supply any necessary plant and equipment i.e. the van; and (3) they are liable for the costs of rectifying any mistakes. The couriers would therefore not be subject to the personal services income regime. (Based on Taxation Ruling TR 2001/8).
In determining whether the results test has been satisfied, the Commissioner considers that contractual terms will not be conclusive if they are merely “window dressing” and do not reflect the real position under the agreement (Taxation Ruling TR 2001/8).
A computer consultancy firm did not satisfy the results test where it was not customary for entities providing the services of IT personnel to be paid on the basis of a result and where the terms of its contracts were not consistent with those of an independent contractor (Nguyen 2005 ATC 2304).
In IRG Technical Services 2007 ATC 5326, the income of two engineers who were recruited to provide engineering services for a major gas project was not for producing a result, but was for the performance of work as part of a co-ordinated team.
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