Personal Services Income (PSI) – 3
Producing a result
To satisfy this condition, the contract between the contractor and the service acquirer must be one requiring the contractor to produce a specified outcome or result and payment is based on performance of the contract (i.e., for producing that outcome or result).
The Commissioner recognises that in some circumstances the income will be for producing a result even though the fee charged may be based on the number of hours worked. For example, where the fee is not determined until after the work has been completed, such as a ‘do and charge’ contract. Calculation of payment itself is not the sole determining factor.
The results test is meant to reflect the traditional criteria for distinguishing independent contractors from employees. These criteria and the relevant factors are summarised in the taxation ruling, TR 2005/16.
Taxpayers should review this ruling if they have any doubts about whether or not the results test applies to their circumstances.
The Commissioner takes the view in paragraph 114 of TR 2001/8 that:
“…producing a result’ means the performance of a service by one party for another where the
first-mentioned party is free to employ his/her own means (i.e., third party labour, plant and equipment etc) to achieve the contractually specified outcome. As the cases show, the essence of the contract has to be to achieve a result and not to do work.”
Generally, under a results-based contract, the fee is payable only when the result is achieved. This does not mean the total fee is payable at the end, the fee may in fact be paid in instalments as certain stages are completed. Each stage will be the achievement of a result. Unless the contractor completed the stage, the fee would not be payable for that stage.
EXAMPLE – Producing a result
Steve is a contract draftsman who does the majority of his work for one firm of architects. Steve has recently contracted with the firm to do design drawings for a large shopping centre project the firm is designing.
Under his contract, Steve is being paid a set fee to complete a set of specified drawings. Rather than being paid the fee in a lump sum at the end of the contract (the contract will take approximately four months to complete), the contract has been divided into four stages and he will be paid 25% of the total fee upon completion of each stage.
This is still a contract for producing a result. Steve’s PSI earned under the contract is for producing a result.
TAX TIP – What the ATO look for
The main factors the ATO will concentrate on are:
(a) the individual must be free to employ their own means to produce the result, including the right to substitute labour (e.g., subcontractors);
(b) the income must be a fixed sum, as opposed to being calculated based on the hours worked (the fixed sum may be based on the estimated hours it will take, but no adjustment is made if it takes more or less hours to produce the result); and
(c) it is not sufficient for a contract to state that the income is paid for producing a result and the individual is liable to rectify defects, if that is not the true substance of the arrangement.