Author Alan Maddick 22nd April 2021
The ATO has recently released a new draft tax ruling covering PSI (Personal Services Income) TR 2021/D2 this will go in force soon possibly with some minor changes. One of the scenarios we come across quite often in IT consultants wanting to know if the PSI rules apply to them.
If capured to by the PSI regime then Consultants will be limited in what they can claim and not be able to effectively use Business Structures like Trusts and Companies as part of their tax planning. So what does the new ruling say ? One of the key tests that IT consultants can pass is the Results test, the new new ruling has a couple of example scenarios;
A government department enters into a contract with Consultant Co for the provision of services by an individual who is nominated in the contract. The terms and conditions of the contract are that the individual is paid an hourly rate and works for a maximum of eight hours per day. Departmental officers provide direction as to the required tasks and the manner in which they are to be performed. The individual is provided with an office, stationery and desktop computer, and uses the department’s computer system, software and data for carrying out the required tasks. He also uses his personal laptop to assist him in his tasks but is not required by the department to use it. If the work performed by the individual is unsatisfactory, the department is entitled to terminate the contract, but the company is not required under the contract to rectify any defects in the work performed. Consultant Co is a PSE because its income includes the PSI of the individual who does the work.
TR2021/D2 at para 177
In this scenario the ruling states this is PSI and the results test is not met.
A government department enters into a contract with Consultant Co for the provision of services by an individual who is nominated in the contract. The terms and conditions of the contract are that the individual is required to develop a product for use on the department’s IT system in accordance with functional specifications provided by the department. The contract specifies a fixed amount by way of payment to Consultant Co for the development of the product which is required to be produced within 12 months of the commencement of the contract. Instalments of the contract price are payable upon achievement of specified milestones. From time to time, the individual uses departmental equipment to access the department’s IT system. However, the development work is undertaken primarily on the individual’s own equipment located at her business premises. If the final product does not satisfy the functional specifications, the contract requires the work to be rectified. Consultant Co is a PSE because its income includes the PSI of the individual who does the work.
TR 2021/D2 at para 180
In this example the results test is quite clearly met. The issue is what if your situaion is somewhere in the middle? For example you are paid per hour but you are liable for the contract if the implementation does not work? At Maddick Consulting Group we are experts at PSI and can help you work out if the PSI rules do apply to you. Please get in touch today.