Personal services income

A recent case involving Personal Services Income (Taneja and Commissioner of Taxation [2009]) highlights the importance of ensuring that you comply with the personal services income legislation. In this case the focus was on the ‘results test’.

If, in a given income year, 75 per cent or more of your personal services income meets all three of the following conditions, you pass the results test for that year.

Under the terms of your contract or agreement:

• Is the income paid to achieve a specified result or outcome?
• Do you have to provide any necessary tools or equipment to do the work?, and
• Are you liable for rectifying defects in the work?

In this case, the taxpayer was paid an hourly rate for consulting services and provided their own plant and equipment. They argued that the results test was passed because the entity was liable for rectifying defects in the work.

The Administrative Appeals tribunal held that, based on the facts, there was nothing to suggest that the taxpayer was being paid to produce a result and therefore the case failed the results test.

Further matters were raised regarding the protection provided by Public Rulings as issued by the Australian Taxation Office and the ability to rely on those to argue your case. Fundamental to obtaining protection from Public Rulings is the concept of ‘reasonable care’.

If you have failed to reach the right conclusion it is important you have taken reasonable care in arriving at your conclusion. The ATO can impose a 25 per cent Administrative Penalty on the basis that the taxpayer or tax agent failed to take reasonable care.

In this case, the taxpayer was not required to pay the 25 per cent penalty because he had consulted a tax agent for advice and had been given incorrect advice. The Tribunal found that a failure to understand fully the effect of the law was not a failure to take reasonable care.

If you are concerned about whether you may be affected by the Personal Services Income Legislation, please contact your Chartered Accountant.