Read our General information on PSI for contractors and consultants

Satisfying the results test and the unrelated clients test are particularly problematic for IT contractors. For these professionals, the failure of the PSI measures to provide a basis for recognising their legitimate PSB status, even where the industry custom and practice provisions of the legislation are accessed, has serious consequences.

These comments set out some of the difficulties experienced by IT contractors in relation to the PSI rules.

Comments on the results test

• Much of the work we do is less defined than engineering tasks (such as designing a bridge). It is more in the nature of providing expert business/commercial advice, e.g. advice re intellectual property, electricity market advice, etc., which is not rectifiable (very hard to provide if the advice is right or wrong) (IT contractor).

• We enter into contracts for payment for our services on a daily rate basis rather than for a tendered amount to complete a defined task (IT contractor).

• These new Rulings fail to deal with the reality of the contract market, particularly in the IT area.

• Whether the contract defines a specific tasks depends on what sort of contractor you are e.g. a software writer may provide a program but what result can a system administrator point to satisfy the test?

• I could not meet the Results test as I get paid for hours performed not results. I am usually required to use the client’s premises and hardware and software, and I have to attend during normal business hours as that is when the rest of the team that I work with is in attendance. I cannot delegate since I have been contracted based on my own experience and qualifications, and I am not liable to correct mistakes.

• Producing a result could be a problem depending on definition. Through my company I am running a program for a Government department. The result will be satisfactorily completing the program which will probably occur on award of the last contract, although there will probably be some ongoing involvement through construction and commissioning.

A 2004 Administrative Appeals Tribunal Australia (AATA) judgement noted that results-based payments were not custom and practice in the IT industry (2004, AATA 720 2004 56 ATR 1162) and a 2009 AATA judgement on PSI for IT contractors has confirmed the problems with satisfying the results test for IT contractors.

In Taneja v ATO (AATA, Ref No: 2007/5830-5833, Walker DP and Frost M, 11 February 2009) the AATA rejected an IT contractor’s claim that when industry custom and practice was taken into account, they satisfied the results test conditions set out in 87-18(a), (b) and (c) and was therefore a Personal Services Business. The custom and practice provisions set out in subsection 87-18(4) state that “regard is to be had to whether it is the custom or practice (a) for the personal services income from the work to be for producing a result, (b) for the entity to be required to supply the plant and equipment or tools of trade needed to perform the work, and (c) for the entity to be liable for the cost of rectifying any defect in the work performed as the case requires. The AATA found that the custom and practice provisions could only be applied where the first condition of the results test was satisfied; in line with IT industry custom and practice, the contracts for service with Taneja’s clients were not structured around results, and the AATA refused PSB status on this basis.

The Taneja judgement confirmed the particular difficulties experienced by IT contractors in relation to the results test. Industry custom and practice for IT contractors is that they are likely to be engaged and paid on an hourly basis with their contracts setting out the scope of work to be performed rather than results to be achieved, making the first condition of the results test difficult to satisfy. IT contractors also often use the IT equipment of the client and it is difficult to put the case that this equipment is incidental to rather than necessary for completion of the work required as needed to satisfy the second condition of the results test. Contract documentation for IT professionals seldom hold the contractor to high levels of liability because of the large number of contingencies unrelated to the contractor which may contribute to defects in the work which would limit their liability at common law, meaning the third condition of the results test is also problematic. IT contracts for service also very often provide for rollover of the contract at the discretion of a client and subsequently periods of engagement which extend beyond 12 months.

A subsequent decision of the AATA has confirmed the problems IT contractors face satisfying the results test found in Taneja v ATO. In spite of generating over $700,000 between 2004 and 2006, the AAT has found that an IT Consultant was not a PSB. The AATA found that that consultant was not a Personal Services Business because his terms of engagement did not specify a result upon which payment was conditional, provided for a notice period meaning payment was potentially not subject to the achievement of a result, did not include any liability for rectification obligation, did not require the contractor to provide the equipment necessary to completion of the work, and the work was not obtained as a direct result of the contractor making offers to the public [Case reference: AAT [2010] AATA 311, Re BRMJCQ Pty Ltd v FCT].

Industry custom and practice also creates problems with the unrelated clients test for IT contractors. These professionals often operate through labour hire agencies – engaged by clients they themselves or the agency have secured – but these clients are not recognised as clients for the purposes of the unrelated clients test, nor is obtaining work through an agency recognised as offering services to the public for the purposes of this test. This means the unrelated clients test fails to provide for even the most basic commercial reality for IT contractors.

The implications for IT contractors are that if a PSB Determination is requested by an IT contractor who is operating in line with industry custom and practice as set out above – either through an agency or directly with a client – the ATO is unlikely to find the results test or unrelated clients test satisfied and PSB status established on either of these bases. With the employment and business premises tests similarly irrelevant, IT contractors almost unavoidably fail the PSB tests while having none of the entitlements or protections available to employees.

These issues are of major concern to Professionals Australia and the ITPA and we will continue to lobby for review of the Rules to better reflect commercial reality for IT contractors.