Business Info

ATO Fact Sheet for PE’s on PSI Results Test

by Kim Rickard, Executive Officer, Connect – APESMA’s Network for Self-employed Professionals

The long-awaited ATO fact sheet on the application of PSI for Professional Engineer contractors was published on 11 November 2003 and is now available from the ATO website at http://www.ato.gov.au/businesses/content.asp?doc=/content/38696.htm. The fact sheet looks at scenarios which cover "grey areas" around the three conditions of the results test, the unusual circumstances provisions in relation to the unrelated clients test, and the business premises test.

What does the fact sheet clarify?

Progressive payment or payment based on a daily rate
The fact sheet provides two examples of contractors satisfying the results test in spite of being paid by progressive payment or payment based on a daily rate. Payment in the examples was conditional upon achievement of specific milestones and the milestones were detailed and annexed to the contract document. In both cases payment was reimbursed if the result was not achieved.

Unusual circumstances – unrelated clients test
The fact sheet states that the ATO will accept that where a contractor has been able to satisfy the unrelated clients test in previous years and where there is a reasonable expectation that they will be able to in subsequent years, the contractor will be regarded as having been able to satisfy the unrelated clients test in the current income year but for unusual circumstances. In the example used, the contractor won the contract under public tender process and refused other work during the 12 month contract which are likely to be important indicators that the true character of the relationship between the taxpayer and acquirer of business services is that of client and contractor.

The ATO however has stated that it does not agree with AAT judgements in this area, and with the Metaskills appeal heard before the Federal Court and the matter currently scheduled for re-hearing before the AAT, Connect would still advise members to consider carefully and seek advice from a tax professional before applying for a PSB Determination on the basis that they would have satisfied the unrelated clients test but for unusual circumstances.

The ATO maintains the view that if engaged on a 12-month contract, the contractor’s circumstances, that is, that of being engaged by a single client, have become usual rather than unusual.

When is a business premises not a business premises?
The fact sheet confirms the assessment that a covered walkway between a home and an otherwise physically separate home office will mean the contractor will not satisfy the business premises test.

Tools and equipment
The fact sheet details specific items that, if provided by the client according to custom and practice, for convenience or because it is more economical for the client, will not mean that the contractor will necessarily fail the second condition of the results test. The items listed as acceptable according to industry custom and practice are measuring instruments, protective clothing, mobile phone, motor vehicle and computer software. The ATO confirms that it will consider whether tools provided by the client are necessary to achievement of the result set out in the contract in making this assessment. The ATO has already confirmed that a laptop is regarded as a legitimate "tool of trade".

Mutual termination clause
While one of the scenarios provided by APESMA to the ATO which is now set out in the fact sheet included a mutual termination clause to test the ATO’s view on inclusion of such a clause, the ATO’s fact sheet was silent on the matter. In the scenario presented, the contract is worded to say there will be no right to pro-rata payment for services performed up until the date of termination, thus obviating the need for the ATO to be explicit about whether or not the inclusion of a mutual termination clause necessarily means the contractor will not satisfy the second condition of the results test. This is disappointing considering we specifically requested clarification and transparency in this area. While the fact sheet suggests that a mutual termination clause of itself will not necessarily mean the contractor would fail to satisfy the results test, on closer reading there is no direct contradiction of Connect’s information which suggests that such a clause is in fact being interpreted directly to mean that the contractor is not exposed to commercial risk of making a loss under the performance of the contract.

In further discussions with the ATO on this matter, Connect has established that the ATO would consider inclusion of a mutual termination clause as a "determining factor" rather than an indicator when assessing the character of the relationship between client and principal. This confirms Connect’s previous advice that an entitlement to payment by way of a mutual termination clause is being interpreted by the ATO as payment for work performed rather than for a result. This is in spite of the fact that a contractor may be exposed to the risk of major financial loss regardless of the inclusion of this clause.

APESMA’s advice to members therefore is to exclude mutual termination clauses when drafting terms of engagement if their PSB status is dependent on satisfying the results test.

This Results Test checklist has been compiled using the examples listed in the Fact Sheet (the fact sheet does not refer to the employment test other than in assessing whether or not the contractor has the right to subcontract work).

Connect Home  |  Join Connect