CASE 12/2011

Members:
Frank O'Loughlin SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2011] AATA 682

Decision date: 30 September 2011

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Frank O'Loughlin, Senior Member

1. The applicant has information technology expertise; and, with him as its principal, a company which the applicant controls (the Company) sought to develop a profitable consulting business, deriving assessable income by contracting out the applicant's consulting services.

2. Before the year ended 30 June 2004 (the 2004 Year), the Company carried on business servicing the needs of a range of clients. In the 2004 Year and the year ended 30 June 2005 (the 2005 Year), the Company's contracts and sources of business happened to converge so that the Company overwhelmingly, if not exclusively, earned its income from a small number of contracts to provide services to entities forming part of a substantial ASX-listed company group (the T group) or from joint venture entities or arrangements in which T group entities had control or significant influence. Included in the entities forming part of the T group were a sub group of wholly owned entities of which S was the intermediate parent company (the S group).

3. The 2004 and 2005 Year convergence of the Company's business has led to primary tax assessments for the applicant for the 2004 and 2005 Years based upon the personal services income rules in Division 87 of the Income Tax Assessment Act 1997 (C'th) (the Assessment Act) and penalty for both years.

Issues for determination

4. The primary tax issue for determination is whether the Company carried on a personal services business.^[1] Within the meaning of s 87-15(1) of the Assessment Act If it did, then the Company, and not the applicant, is the proper taxpayer to be assessed and the applicant succeeds. Whether the Company carried on a personal services business is significantly affected by whether or not the income that it derived was income for producing a result,^[2] s 87-18(3)(a) one of the threshold conditions necessary to meet the results test,^[3] s 87-18 and whether 80% or more of the applicant's personal services income was from the same entity or its associates.^[4] For the purposes of s 87-15(3)

5. If the applicant is the proper taxpayer to be assessed and there was a shortfall amount,^[5] Within the meaning of s 284-80 of Schedule 1 to the Taxation Administration Act 1953 (C’th) (the Administration Act) the penalty issue becomes whether the reasonable care standard has been met and, if not, whether any penalty that is payable ought be remitted.

The tests the company must meet for the applicant to succeed

6. The Company did not have a personal services business determination.^[6] Within the meaning of ss 87-60 or 87-65 of the Assessment Act Therefore, the Company will be a personal services business if it passed the 80 per cent test^[7] s 87-15(3) of the Assessment Act and met one of the four personal services business tests.^[8] Within the meaning of s 87-15(1)(c) of the Assessment Act

The 80 per cent test

7. The 80 per cent test has two components. For a company, the first component requires an examination of the extent to which the individual's personal services income is derived from a single entity and its associates. The second is whether at least 75 per cent of that individual's personal services income, that is included in the company's ordinary or statutory income, is income for producing a result as defined.^[9] s 87-18 The second component is only enlivened if more than 80 per cent of relevant personal services income is derived from the one entity and its associates. The 80 per cent test is passed if:

• (a) less than 80 per cent of the applicant's personal services income is from the same entity and its associates; or
• (b) 80 per cent or more of the applicant's personal services income is from the same entity and its associates and the results test^[10] s 87-18 is passed.

The personal services business tests

8. The four personal services business tests are:

• (a) the results test;^[11] s 87-18
• (b) the unrelated clients test;^[12] s 87-20
• (c) the employment test;^[13] s 87- 25 and
• (d) the business premises test.^[14] s 87-30

The 80 per cent test and the personal services business tests interplay

9. The structures of the 80 per cent test and the personal services business tests are such that without a personal services business determination:

• (a) if more than 75 per cent of the applicant's personal services income meets the results test, then the Company's business will be a personal services business and the applicant succeeds in his challenges to the Commissioner's objection decisions;
• (b) if 80 per cent or more of the applicant's personal services income came from the same entity and its associates then the results test is pivotal. If at least 75 per cent of the applicant's personal services income was income for producing a result, thereby passing the results test, then one of the four personal services business tests is passed, the Company's business will be a personal services business and the applicant succeeds in his challenges to the Commissioner's objection decisions. In those circumstances, it would not be necessary to go to any of the remaining three personal services business tests. Conversely, if less than 75 per cent of the applicant's personal services income was income for producing a result, thereby not passing the results test, then the applicant's personal services income will not be income from the conduct of a personal services business and his challenges to the Commissioner's objection decisions fail without any need to consider the remaining three personal services business tests; and
• (c) if less than 80 per cent of the applicant's personal services income came from the same entity and its associates, then it is necessary for the Company to pass any of the four personal services business tests for the applicant to succeed in his challenges to the Commissioner's objection decisions.

Agreed matters

10. Some matters are agreed between the parties. They are:

• (a) the applicant was a shareholder in and a director of the Company, and for the 2004 and 2005 Years was its sole employee generating personal services income;
• (b) if Divisions 85 and 86 of the Assessment Act apply, the Company:
  • (i) was a personal services entity within section 86-15(2) for both the 2004 and 2005 Years because, for both years, its income in that year included the personal services income of the applicant; and
  • (ii) did not hold a personal services business determination for either of the 2004 or 2005 Years;
• (c) the employment test is not relevant to either year;
• (d) the business premises test is not relevant to 2005 Year; and
• (e) wholly-owned companies in the T group and the S group are associates.

2004 Year

11. In the 2004 Year, the Company earned income through two independent labour hire agencies. The first, Paxus Australia Pty Ltd (PAXUS), contracted with the Company to provide the applicant's services to T group entities (T group contracts). The second, X20 Pty Ltd, contracted with the Company to provide the applicant's services to two unrelated entities. More than 95 per cent of the Company's income was derived from T group contracts. All of that income was the applicant's personal services income. The income derived by the Company from T group contracts exceeded 75 per cent of the applicant's personal services income.

12. For the 2004 Year the applicant contends that:

• (a) the Company satisfied the results test either because it was an independent contractor under the common law or because it otherwise met the terms of s 87-18(3); or
• (b) if the Company did not pass the results test, then it passed the unrelated clients test or the business premises test.

13. Passing the results test for the 2004 Year would secure for the applicant an automatic pass of the 80 per cent test. If the 80 per cent test is not passed then it is unnecessary to consider the unrelated clients and business premises tests.

14. To determine whether the Company passed the 80 per cent test and, if necessary, the results test in the 2004 Year, it is necessary to examine factual matters in greater detail.

15. In the 2004 and 2005 Years the T group was a service provider to a number of large ASX-listed corporate groups. The T group provided lap top and desk top computer requirements and software systems to these groups. The N group was one such client. The services required of the T group to the N group had performance benchmarks and if those benchmarks were not met the T group was liable to pay the N group amounts described as penalties.

16. Through wholly-owned subsidiary companies within the T group, or through partly owned companies over which the T group had significant influence or control, the T group had teams of information technology (IT) professionals who assisted it to deliver the services it contracted to provide to its clients/customers including the N group. A Pty Ltd was one of the entities through which the T group contracted to provide services to the N group. A Mr D was a T group executive responsible for a number of teams of IT professionals who, at the start of the 2004 Year, were attached to A Pty Ltd. Within those teams Mr D had a need for an additional resource with the applicant's skills.

17. As a result of prior business connections, and a referral by someone who knew the applicant and Mr D, in the 2004 Year the Company secured continuous work under the T group contracts. Mr D formed the view that the applicant had the ability to help Mr D's team deliver IT solutions to a T group customer, the N group, and engaged him, through the Company, to meet that need.

18. Upon first securing the T group contract work, the Company was advised by Mr D that T group protocols made it necessary to contract through an approved service provider organisation and the Company was referred to PAXUS. The Company observed these requirements and contracted with PAXUS to provide the applicant's services to the T group.

19. During the 2004 Year the Company entered the following T group contracts:

• (a) T group job no 2000 3748 on 2 July 2003 for the period from 1 July 2003 to 30 September 2003;
• (b) T group job no 2000 39055 on 1 October 2003 for the period from 1 October 2003 to 31 March 2004; and
• (c) T group job no 2000 42330 on 29 March 2004 for the period from 1 April 2004 to 30 September 2004.

20. Each of the T group contracts specified the T group as the client to whom the Company was required to provide the applicant's services and a rate of pay of $75 per hour, required the Company to have professional indemnity insurance and restricted the Company's rights to substitute someone else's labour for the applicant's. The reasons for the professional indemnity insurance requirement were not established by any evidence and no conclusions can be drawn. T group contracts had standard periods of 30, 60, 90 and 120 days with adjustments and extensions as required. Hours worked were used as a proxy for progress of delivery of the applicant's services. Mr D was able to assess hours worked against progress on a project by reference to a project framework. If work and client demand existed, contracts were extended or rolled over.

21. Under some, if not all, of the T group contracts the applicant worked as part of a team of information technology professionals on various projects. These projects had objectives. For example, the objective of the project on which the applicant worked under the first T group contract was to improve the services provided by the T group to the N group to reduce or eliminate penalties the T group had to pay to the N group for failures to meet service standards. Recommendations made by the applicant were reviewed by T group management, and at times N group client management, and if accepted they were implemented. At times the applicant was engaged in more than one project simultaneously. The activities the applicant engaged in in these projects entailed reviewing a particular state of affairs and systems and related operations, and formulating and making recommendations to assist the T group, for example, in meeting its business commitments to its clients.

22. Some of the projects did not have time frames for completion nor budgets. Subject to meeting minimum service requirements, the hours the applicant was required to work were flexible. Under each of the T group contracts, the Company was paid for the hours the applicant worked and would have been paid for the time spent fixing mistakes in any of the work done. Had the applicant's services been unsatisfactory, the Company would have been paid for the hours worked and the arrangements terminated. The applicant was good at what he did and he was said by Mr D to have produced results.

23. The first entity to which the Company provided the applicant's services under the T group contracts was A Pty Ltd. That company was described by Mr D as half owned by the T group. The evidence showed that the T group owned significantly more than half the issued shares and each of IBM and Lend Lease groups owned a minority of the issued shares. The applicant did not lead any evidence of the rights attached to any of the issued shares. In these circumstances, the Tribunal cannot conclude that A Pty Ltd was not an associate of the wholly owned entities in the T group. To the extent the applicant is required to discharge the burden of proving that A Pty Ltd was not such an associate to succeed in the proceeding he has not done so. A Pty Ltd subsequently became wholly owned by the T group and changed its name to TES Pty Ltd.

24. Services under subsequent T group contracts were provided to A Pty Ltd, then named TES Pty Ltd, or to other companies wholly owned by the T group.

25. Some of the projects in which the applicant was engaged under the T group contracts were described by Mr D as joint ventures or partnerships with the N group. T group entities (including A Pty Ltd) and N group entities contributed to the resources used in these ventures. The weight of the evidence led was that the Company and, through it, the applicant, were engaged to provide services to T group entities, the Company was indirectly paid by the T group entities and directly paid by PAXUS. To the extent that T group entities were participants in partnerships or joint ventures and the applicant's services were consumed in these ventures, the best description that could be afforded to the arrangements for the applicant's services on the evidence led is that those services were part of the T group's contribution to the ventures.

26. Accordingly, for the 2004 Year and the T group contracts, the Tribunal concludes that the Company was engaged by PAXUS to provide the applicant's services to entities that were either wholly or majority owned by the T group and that the T group entities, including A Pty Ltd, were all associates.^[15] Within the meaning of s 318 of the Income Tax Assessment Act 1936 (C’th) (the 1936 Assessment Act).

27. Significantly more than 80 per cent of the applicant's personal services income for the 2004 Year was paid directly to the Company by PAXUS, pursuant to the T group contracts. The indirect sources of these payments were T group associates. Further, the income derived pursuant to the T group contracts was more than 75 per cent of the applicant's personal services income.

Independent contractors and the results test

28. As indicated above, part of the applicant's case is based on the proposition that the personal services rules are not supposed to apply to amounts paid to independent contractors and the results test should be construed accordingly, such that, if the Company is an independent contractor as generally understood, then the Company's dealings pass the results test.

29. Following the decision of Allsop J in
IRG Technical Services Pty Ltd v Deputy Commissioner of Taxation,^[16] [2007] FCA 1867 at [37] to the effect that while the common law criteria for determining whether a person is an independent contractor might have been the foundation for the results test, the results test is met by satisfying three particular criteria in the legislation, the applicant's contention cannot be accepted. It is the terms of the operative test in the statute that must be met and not the terms of the guide.

The s 87-18(3) results test

30. Section 87-18(3) provides as follows:

"(3) A * personal services entity meets the results test in an income year if, in relation to at least 75% of the * personal services income of one or more individuals that is included in the personal services entity's * ordinary income or * statutory income during the income year:

• (a) the income is for producing a result; and
• (b) the personal services entity is required to supply the * plant and equipment, or tools of trade, needed to perform the work from which the personal services entity produces the result; and
• (c) the personal services entity is, or would be, liable for the cost of rectifying any defect in the work performed."

31. These tests are cumulative; all three must be satisfied.

32. In his decision in IRG Technical Services, Allsop J indicated that the results test calls for examination of what the income is, or was for; and whether it is for producing a result requires … attention to all the circumstances of the individual, and in particular, what the individual does at, and with, the ultimate acquirer or requirer of the services.^[17] IRG Technical Services at [50] Describing a contractual obligation as one to provide deliverables may be a legitimate use of the word 'deliverables' but might not change the substance of the arrangement that the relevant work is the performance of services of a skilled person in exchange for an hourly contractual rate.^[18] IRG Technical Services at [90] and [100] It is necessary to look to the substance of the matter^[19] IRG Technical Services at [108] and, in circumstances where payment is for work as a professional person, where the work produced results or outcomes as a necessary professional consequence of that work, the income is unlikely to be for a result in the relevant sense.^[20] IRG Technical Services at [110]

33. In the present matter it can be accepted that:

• (a) the Company had been in business for some period with other clients and that it advertised, bore some business risks and maintained and used its own equipment; and
• (b) the applicant:
  • (i) is a skilled technology architect with industry experience;
  • (ii) had provided his services through the Company for a period prior to the 2004 Year;
  • (iii) secured the work for the Company pursuant to the T group contracts as a result of his reputation, which was forged with one of his clients before the 2004 Year;
  • (iv) although approached to carry out work by the T group, observed the T group's protocols and contracted through a T group service provider panel member;
  • (v) provided some of his own equipment to undertake his work;
  • (vi) did not have an office or permanent desk at any of the service acquirer's facilities but could access a desk if he required one;
  • (vii) was paid an hourly rate for hours worked to a daily cap;
  • (viii) did not receive holiday pay;
  • (ix) did not receive annual leave;
  • (x) did not have sick leave;
  • (xi) had no set hours (although the T group contracts stipulated hours, the evidence is that on many days there were departures from the hours stipulated);
  • (xii) did not have superannuation paid by the service acquirer;
  • (xiii) neither needed nor had access to the service acquirers' computer systems, internet, printers or photocopiers;
  • (xiv) was required to meet his own expenses in travelling between sites;
  • (xv) had his recommendations reviewed by client management before adoption;
  • (xvi) delivered his work in the form of reports and recommendations to senior management that could be either accepted or rejected by senior management;
  • (xvii) did not produce his documentation on the service acquirers' computer systems;
  • (xviii) at the T group or within the T group organization, worked as an architect in a team of up to 43 architects, on at least seven different projects; and
  • (xix) was required to have professional indemnity insurance.

34. These factors, however, do not transform payments made pursuant to a contract under which:

• (a) a person's services are provided to supplement a team;
• (b) the person works on projects in which the team is involved;
• (c) remuneration is linked to hours worked;
• (d) the nature of the work is to provide professional expertise in reviewing existing circumstances and making recommendations which may or may not be accepted and acted upon; and
• (e) the response to defective or unsatisfactory work would be to pay the person for hours worked and to terminate the arrangement,

  into income for producing a result.

35. The applicant's case seeks to transpose the object of a project on which he worked into the subject matter for which the Company was paid. As an illustration of the applicant's submissions, the applicant contends that the first T group contract was a contract for producing a result and that the income produced pursuant to it was income for producing a result, namely to eliminate substantial penalties that were being paid to the N group by the T group pursuant to the contract between those groups for provision of information technology services. This is the consistent theme of the applicant's contentions in relation to the income in respect of all contracts through which the Company contracted for the provision of the applicant's services.

36. This is not the proper characterisation to be given to either the contracts or the income produced as a result of them. The proper characterisation is that the contract was for the Company to make the applicant's services available to the T group or entities within that group, to work on projects, the first of which had as its object eliminating the penalties the T group was sustaining under its arrangements with the N group. The applicant was required to review a given state of affairs, formulate recommendations for improving that state of affairs which would be reviewed by T group and N group management and may or may not have been accepted, and the Company would be paid for the hours the applicant worked (subject to a daily cap). There is no evidence that the applicant would not be paid either if the recommendations were not acted upon or, if acted upon, failed to produce the project objectives. Income produced through the above activities is not income for producing a result within the meaning of s 87-18. This income is for the provision of expert specialist services that the Company, through the medium of the applicant, was able to provide. It matters not that the applicant might be described as a man who gets results.

37. Consistently with the decision in IRG Technical Services, the Company entered contracts to provide the applicant's services in circumstances where it cannot be said that the Company contracted to produce a result or that income was derived for producing a result.

The 80 per cent test

38. As noted above, the 80 per cent test is failed if 80 per cent, or more, of an individual's personal services income is from one entity (or one entity and its associates) and the results test is not met.

39. The applicant contends that the underlying clients of the labour hire firms through which the Company contracted with those clients are the relevant entities to consider when applying the 80 per cent test. The Commissioner submits that this is incorrect and that Skiba and Federal Commissioner of Taxation^[21] [2007] AATA 1705 and BRMJCQ Pty Limited and Commissioner of Taxation^[22] [2010] AATA 311 make clear that the 80 per cent test is concerned with the immediate source of the applicant's personal services income, that is, who has made the payments (or is obliged to make the payments). The Commissioner contends that in Skiba and BRMJCQ the interposed labour hire firm/agency was the source of the payments (i.e. the income) and was the relevant entity to consider for the purposes of the 80 per cent test. The Commissioner also contends, in the alternative, that if the focus of the 80 per cent test is the end client and not the interposed labour hire firm/agency, then the applicant fails the 80 per cent test as the associate inclusive income from end clients exceeds the 80 per cent threshold in each year.

40. While the decisions in Skib a and BRMJCQ support the Commissioner's contention, they did not involve circumstances like the present one where the Company had procured the assignments and contracted with T group related entities through approved labour hire agencies so as to comply with T group's internal governance requirements. The test is sufficiently broad to look to the number of clients of the service provider and is an integrity measure to limit the scope of the unrelated clients test in s 87-20. In circumstances where the origins of the contracts with labour hire firms are found in commitments made directly between the service provider and the end consumer of the services, the 80 per cent test can be applied more broadly than in Skib a and BRMJCQ.

41. For the 2004 Year, the Company failed to meet the 80 per cent threshold part of the 80 per cent test on either the Skib a and BRMJCQ construction or a broader construction looking to the ultimate consumers of the services. All of its personal services income came directly from PAXUS or indirectly from T group associates.

42. The effect of not meeting both the results test and the threshold part of the 80 per cent test is that the Company failed to meet the 80 per cent test and was not a personal services business for the 2004 Year.

Other elements of the results tests

43. Given the conclusion above, strictly speaking it is not necessary to go to the other two elements of the results test. Three brief observations ought be made:

• (a) the requirement to have professional indemnity insurance is the only evidence advanced in support of the proposition that either the applicant or the Company was required to meet the cost of rectifying defects in work. Given that an obligation to have such insurance is not the same as an obligation to rectify defects, at best this is only evidence from which an inference can be drawn, if it is appropriate to do so. In this regard, inferences can at times be drawn from observed facts. Assumptions, guesswork and speculation are not accommodated in the process of arriving at conclusions.^[23] See Tisdall v Webber [2011] FCAFC 76 at [128] per Buchanan J, with whom Tracey J agreed. There must be a body of evidence that might reasonably sustain a relevant finding of fact or permit the Tribunal to draw an inference.^[24] See Tisdall , above, at [127] per Buchanan J, with whom Tracey J agreed. Given that there may be a number of reasons that a requirement for professional indemnity insurance might be imposed, it is not appropriate to draw the inference sought by the applicant. In fact Mr D's evidence was to the effect that the Company would probably be paid to fix mistakes that had been made along the way and, if performance was unsatisfactory, the Company would be terminated and paid up to the date of termination; and
• (b) use of computer equipment and facilities for the work done in circumstances where no other equipment is required to do the work may well be enough for a finding that the Company meets this element of the results test but, even if it did, that does not mean that the results test as a whole has been met; and
• (c) a standalone garage may be a separate premises and it may be one for which a personal services business entity may have exclusive use. To be a separate premises allowing the personal services entity to meet the separate business premises test it needs to be one at which the individual or entity mainly conducts activities from which personal services income is gained or produced. It is apparent that if the Company mainly conducts, at the garage, the activities from which personal services income was gained or produced, then the requirement is satisfied.^[25] Commissioner of Taxation v Dixon Consulting Pty Ltd 2006 ATC 4832 at [36] Emmett J

2004 Year conclusion

44. Given that the company did not meet the results test, as outlined above, and that more than 80 per cent of relevant personal services income came from associated entities, s 87-15(3) concludes the matter. Subject to adjustments that are required to assessments, the objection decision must be affirmed.

2005 Year

45. In the 2005 Year, the Company earned income through two independent labour hire agencies. The Company continued to be a party to T group contracts with PAXUS. The second, eQuus IT Resources Pty Ltd (eQuus), contracted with the Company to provide the applicant's services to the S group (S group contracts). The proportion of the Company's income derived through PAXUS, pursuant to T group contracts, and through eQuus, pursuant to S group contracts, exceeded 80 per cent of the Company's income. All of that income was the applicant's personal services income. The income derived by the Company from T and S group contracts exceeded 75 per cent of the applicant's personal services income.

46. For the 2005 Year the applicant contends that:

• (a) the Company satisfied the results test either because it was an independent contractor under the common law or because it otherwise met the terms of s 87-18(3); or
• (b) the Company was entitled to rely on the Commissioner's discretion, articulated in paragraph 48 of Tax Ruling 2001/8, in relation to associates and the unrelated clients test.

47. Passing the results test would automatically mean that the Company would pass the 80 per cent test.

48. The applicant's alternative submission is that the Company should be regarded as having passed the independent clients test in s 87-20, by reason of the discretion set out in paragraph 48 of TR2001/8 which provides that:

"48. Associates are defined in section 318 of the ITAA 1936. If an independent contractor does not know or could not reasonably be expected to know that the service acquirers are associates, then the fact that the clients are associates of each other will not of itself be regarded as causing the test to be failed."

49. To determine whether the Company passed the 80 per cent test and, if necessary, the results test in the 2005 Year, it is necessary to examine factual matters in greater detail.

50. During the 2005 Year, the Company earned income from T group and S Group contracts. At the start of the year the Company was party to the T group contract for T group job no 2000 42330 for the period from 1 April 2004 to 30 September 2004. In addition, the Company entered the following T group and S group contracts:

• (a) T group job no 2000 46500 on 15 September 2004, for the period from 1 October 2004 to 31 December 2004;
• (b) S group job no 200 2969 on 19 January 2005, for the period from 20 January 2005 to 4 March 2005; and
• (c) S group job no 200 2969-01 on 7 March 2005, for the period from 7 March 2005 to 10 June 2005 (an extension of the contract for S group job no 200 2969 entered on 19 January 2005).

51. The terms on which the Company was engaged under T group and S group contracts in the 2005 Year and the services provided in that year were, in material respects, the same as for the 2004 Year.

The s 87-20 independent clients test

52. It is appropriate to deal with the s 87-20 independent clients test and the so-called discretion contention first.

53. Paragraph 48 of TR2001/8 does not concern a discretion in the sense of a power provided by an enactment, which allows for particular outcomes or for a course to be adopted in prescribed circumstances, or upon formation of opinions and the like. It is part of a ruling that, if applicable, can be relied on to produce a more favourable taxation outcome than would be the case if the statute were to be strictly applied.

54. The evidence is clear that until the applicant began working at the S group, he did not know that it was wholly owned by the T group and the manner in which the S group contracts were secured by the Company would not have thrown light on that relationship. It can be readily accepted that until the applicant began work with the S group he was not aware of the connection with the T group. However, as soon as the applicant began working with the S group it would have become reasonably apparent that the two groups were related. The S group projects on which the applicant worked involved well known products and services linked to the T group.

55. This is not a case where the strict terms of the legislation are altered by the ruling.

56. The T group wholly owns the S group and the applicant accepts that they are associates as defined. Given that the circumstances are such that the ruling does not apply, the unrelated clients test is not met.

Independent contractors and the results test

57. For the reasons outlined above, the applicant's contention that the Company passed the results test because it was an independent contractor must be rejected. The results test is not met by reason of the proposition that the Company may have been an independent contractor as ordinarily understood.

The s 87-18(3) results test

58. Section 87-18(3) is set out above, as are the applicable principles.

59. The work done for the S group in the 2005 Year was under contracts and arrangements that were, for all practical purposes, identical to the work done under the T group contracts. The Company contracted to make the applicant's services available to the T group, or entities within that group, and the S group, or entities within that group, to work on projects which may have had particular objects. The applicant was required to review a given state of affairs, formulate recommendations for improving that state of affairs which would be reviewed by T group and S group management and which may or may not have been accepted. The Company would be paid for the hours the applicant worked (subject to a daily cap) and there is no evidence that the applicant would not be paid either if the recommendations were not acted upon or, if acted upon, failed to produce the project objectives.

60. As is the case for the 2004 Year, the conclusion to be reached is that the Company did not earn income for producing a result such that the results test in s 87-18 is not met.

2005 Year conclusion

61. In circumstances where neither the results test nor the unrelated clients test are met, and no other bases are advanced by the applicant upon which the Company can be said to have conducted a personal services business, the necessary conclusion is that the applicant fails in his challenge to the Commissioner's objection decision that the Company did not carry on a personal services business. Subject to adjustments that are required to assessments, the objection decision must be affirmed.

Penalty

62. In relation to any penalty, the applicant contends that:

• (a) by engaging a registered tax agent, delivering all of the relevant records to the tax agent and relying on the tax return prepared by that registered tax agent, if the applicant made a false or misleading statement that resulted in a shortfall amount, the applicant had not failed to exercise reasonable care; or
• (b) if the applicant is taken to have failed to exercise reasonable care then that failure reflects the failure of the registered tax agent to exercise reasonable care in preparing the tax return that he had been engaged to prepare;
• (c) if a penalty is imposed on the applicant he is entitled to have it remitted by the maximum amount of 80 per cent on account of disclosing all the relevant information to the Commissioner during the review period or before being advised by the Commissioner that an audit had commenced, consistent with paragraphs 118-124 of Practice Statement Law Administration (PS LA) 2006/2.

63. The evidence led by the applicant is that he was not aware of the personal services business rules and that he provided all necessary records and contracts to a registered tax agent the Company had engaged to prepare income tax returns. This evidence was not challenged. The evidence from the registered tax agent was unhelpful. It was to the effect that training and research had been undertaken in relation to the personal services income rules but what had been done for the Company and the applicant for the 2004 and 2005 Years could not be established because relevant records were not available.

64. In the circumstances, the applicant has not demonstrated that reasonable care has been taken for the purposes of item 3 in the table in s 284-90 of Schedule 1 to the Administration Act.

65. Similarly, there is insufficient, if any, evidence of disclosures being made to the Commissioner which would warrant a remission of the penalty payable.

66. In circumstances where adjustments need to be made to the income of the Company, and possibly the applicant's spouse, on account of the application of the personal services rules, it is appropriate to remit penalty such that the amount of penalty is 25 per cent of the net shortfall having regard to reductions in the liabilities of other taxpayers.

Decision

67. In circumstances where the personal services rules will require review of the applicant's assessments to ensure he is allowed the benefit of deductions for some but not all losses and outgoings sustained by the Company and require penalties to be recalculated by reference to net shortfalls, having regard to both additional deductions and adjustments to be made to assessments of other taxpayers, the appropriate form of decision is as follows:

• 1. Subject to reconsideration and recalculation of income tax and penalty required, the Commissioner's objection decisions that:
  • (1) the Personal Services Income rules apply to include income of the Company in the Applicant's assessable income; and
  • (2) penalty is payable

    are affirmed.

• 2. The applicant's assessments of income tax liability and penalty for the 2004 and 2005 Years are set aside and remitted back to the Commissioner pursuant to s 42D of the Administrative Appeals Tribunal Act 1975 (C'th) for reconsideration and recalculation of:
  • (1) assessable income to accommodate adjustments necessary to ensure deductions allowable are included in the calculation of the applicant's taxable income for the 2004 and 2005 Years; and
  • (2) penalty is payable

  and issue of new assessments accordingly.

68. The parties are directed to lodge with the Tribunal and serve on each other further submissions within 14 days of the date of these reasons for decision about the appropriateness (or otherwise) of the terms of the decision in paragraph 67 above.