Personal services income — proposed changes

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Personal services income — proposed changes

The personal services income rules have prompted heated debate since they commenced on 1 July 2000.

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Australian Business Ltd 

 

The personal services income rules have prompted heated debate since they commenced on 1 July 2000.  One important issue has been the complexity of the rules, leaving many contractors unsure whether they're affected and, if they are, what impact this has on their tax liabilities.  Another important issue has been the inconsistency between how practitioners, the Tax Office and the Government interpret the rules. A Bill introduced into Parliament on 30 August 2001 (the Taxation Laws Amendment Bill (No 6)2001) aims to clarify some of these contentious issues and to make compliance easier. If and when the legislation is passed, it will operate from 1 July 2000.
 
Taxation and Superannuation Consultant, Shirley Murphy, summarises the Bill:
 
New results test
 
Taxpayers who are conducting a personal services business fall outside the personal services income rules. Up to now, a taxpayer who received more than 80% of its personal services income from one client could only be treated as conducting a personal services business if it received a personal services business determination from the Tax Office. A taxpayer who received less than 80% of its personal services income from one client could self-assess itself (against an employment test, an unrelated clients test or a business premises test) as conducting a personal services business. If such a taxpayer did not self-assess itself as passing one of these tests, it could not ask for a personal services business determination from the Tax Office even if there were extenuating circumstances.
 
The Bill proposes another test — the results test — against which taxpayers can self-assess themselves whether they receive more or less than 80% of their personal services income from one client.  The results test will be met where:
the contract is to produce a specified outcome or result and payment is based on performance of the contract (ie for producing the outcome or result);
  • the contractor provides the equipment and tools, if any, necessary for doing the work — if no plant and equipment or tools of trade are necessary to perform the work, this condition would be satisfied;
  • the contractor bears the commercial risks, including liability for defective work and including rectification achieved by pursuing a legal remedy for damages where the defect is incapable of physical repair — according to the Government, this reflects the entrepreneurial risk of an independent contractor in contrast to the 'employee-like' contractor.
If a taxpayer self-assesses themselves as passing the results test, there is no need for a personal services business determination from the Tax Office even if more than 80% of the taxpayer's personal services income comes from one client.  The other three tests — the employment test, the unrelated clients test and the business premises test — will continue to be used only if the taxpayer earns less than 80% of personal services income from one client. The Bill also allows taxpayers to apply for a personal services business determination from the Tax Office even if they earn less than 80% of their personal services income from one client.
 
Agents
 
The unrelated clients test requires a taxpayer's personal services income in a year to come from providing services to at least two unrelated clients. Agents (ie persons acting for or representing another, but not including an employee) who satisfy four conditions will find it easier to satisfy this test. The conditions are:
  • the agent receives income from the principal for services the agent provides to customers on the principal's behalf;
  • at least 75% of that income is commissions or fees based on the agent's performance in providing services to the customers on the principal's behalf;
  • the agent actively seeks other entities to whom the agent could provide services on the principal's behalf; and the agent does not provide any services to the customers, on the principal's behalf, using premises that the principal, or an associate of the principal, owns or has a leasehold interest in, unless the agent uses the premises under an arrangement entered into at arm's length.
 
If an agent satisfies these conditions, the income received from the principal during the year for services provided to customers on behalf of the principal will be treated as though the income is from the customers, and the services the agent provides on behalf of the principal will be treated as though the agent, and not the principal, provided the services to the customer. Although this will make it easier for the agent to satisfy the unrelated clients test, the agent will still have to show that the services were provided as a direct result of the agent making offers or invitations to the public at large.
 
Tax office rulings 
 
The Tax Office has issued two rulings to help explain the personal services income rules.  Taxation Ruling TR 2001/7 explains the meaning of personal services income, and Taxation Ruling TR 2001/8 explains what is a personal services business. These can be downloaded from the Tax Office website
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