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AJML Accountants Update – September 2017

Personal Services Income  (PSI) – 5

Requirement to supply plant and equipment or tools of trade

Fortunately, the Commissioner reads this condition as being “the individual or personal services entity supplies the equipment or tools, if any that are necessary to do the work” (emphasis added).

In paragraph 35 of TR 2001/8, the Commissioner confirms that this condition is not failed merely because plant and equipment or tools of trade are not needed to do the work. Where no plant and equipment or tools of trade are necessary to perform the work, the condition will still be satisfied. However, regard must be had to the custom or practice in that particular industry. If it would be expected that the equipment normally used to undertake the work will be provided by whoever actually performs the work, then the contractor must supply their own plant and equipment or tools of trade. If they do not supply them, they will not satisfy the condition.

It is only where it is custom and practice in the particular industry that plant and equipment or tools of trade are not necessary to perform the work, that the contractor will satisfy the condition if the contractor does not provide any plant and equipment or tools of trade. This interpretation of the Commissioner is more generous than that provided in the original EM which provided at paragraph 1.115:

“If no plant and equipment or tools of trade are needed to perform the work, the condition is not satisfied.”

TR 2001/8 is a public binding ruling and so taxpayers should have comfort following it. However, a court or tribunal may adopt the interpretation quoted above.

The Contractor

The contractor is not required to provide all plant and equipment and tools of trade. The contractor is only required to provide those that are necessary to do the actual work that the contractor is contractually required to perform. For example, independent contractors in the building industry, such as carpenters, electricians etc, may not provide scaffolding at a construction site, but this would not cause them to fail the test. Having regard to the building industry, it is not common practice for carpenters and electricians to provide the scaffolding.

Fortunately, the Commissioner also takes the practical view that the condition is to be considered on a substantive basis and de minimus usage of the tools or equipment of the client will not of itself disqualify the contractor, for example, if the contractor uses a client’s telephone or pen. Even the temporary use of the client’s tools, which are normally supplied by the contractor, will not cause the condition to be failed, where it is more convenient to do so because,

for example, the contractor’s tools are not readily available at a particular time. Provided the contractor supplies and uses their own tools most of the time, the odd use of the client’s tools will not cause the condition to be failed.

Liability for cost of rectifying any defect

Under this test, the contractor must bear the commercial risk involved with performing the services. If the services are defective, then the contractor is liable to rectify the defect at the contractor’s own expense. This is different to an employment situation where if there is a defect in the employee’s work, the employee is not normally liable for the defect. The emphasis is on the liability for the cost of rectifying faulty work. The contractor need not

personally rectify the defect. As long as the contractor pays for rectification of the defect, it does not matter if the work is performed by somebody else.