Passing the ‘result test’ in Personal Service Income
Section 87-18(1) provides that an individual or PSE will pass the results test in an income year where all of the following conditions are satisfied in respect of at least 75% of the individual’s PSI (or the PSI of one or more individuals included in the PSE’s assessable income):
- The income is generated for producing a result – broadly, case law has established that the essence of producing a result involves the performance of a service to achieve a contractually specific outcome. An important indicator of this is that payment is only made when an agreed outcome is achieved, rather than for services provided (i.e., on a time basis). Refer to World Book (Australia) Pty Ltd v FCT 108 ALR 510 and paragraph 114 of TR 2001/8.
- The individual is required to supply plant, equipment, or tools of the trade – this condition is satisfied where an individual or PSE is required to supply plant, equipment, or tools of trade, to perform the work which produces the result. It is important to note that this condition will not be failed where no plant and equipment or tools of trade are needed to produce the result. Refer to paragraphs 124 and 130 of TR 2001/8.
- The individual or PSE is or would be, liable for the cost of rectifying any defect in the work performed – broadly, this condition is satisfied if the individual or PSE is (or would be), exposed to ‘commercial risk’ in terms of the liability for the cost of rectifying any defect in the work performed. Refer to paragraph 131 of TR 2001/8.
Under S.84-18(4), when determining whether the three conditions in the results test are passed, regard is to be had to whether it is the ‘industry custom or practice’ when work of the kind in question is performed by an entity other than an employee (e.g., an independent contractor).
In this regard, in Taneja v FCT [2009] AATA 87, the AAT confirmed that the ‘main purpose’ of the provision is to act as a safety net for those individuals or entities who cannot point to a written agreement to establish that they have been paid “producing a result”. For example, in circumstances where the industry custom or practice is that people are engaged to produce a result, then the fact may support a conclusion that the particular individual or entity was paid for producing a result.
On the other hand, the provision cannot come to a person’s aid where there is a written agreement specifying that the person is entitled to payment for doing something that does not amount to producing a result. In the AAT’s view, to hold otherwise would remove an entire industry, the criterion in S.87-18(3)(a) as a necessary step in meeting the results test which cannot have been the intention of the legislature.