Prasad Business Centres Pty Ltd and Commissioner of Taxation

[2015] AATA 411

[2015] AATA 411 

Division	TAXATION APPEALS DIVISION
File Number(s)	2014/1252
Re	Prasad Business Centres Pty Ltd
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Professor R Deutsch, Deputy President
Date	11 June 2015
Place	Sydney

The decision under review is affirmed.

..................................[sgd]......................................

Professor R Deutsch, Deputy President

CATCHWORDS

TAXATION – Income Tax – personal services income – personal services entity – personal services business determination – results test – whether a personal services business determination should be made – whether applicant’s income was for producing a result – decision affirmed

LEGISLATION

Income Tax Assessment Act 1997 ss 87 – 18, 87 – 65

CASES

Hollis v Vabu Pty Ltd 2001 ATC 4508

IRG Technical Services Pty Ltd v Deputy Commissioner of Taxation (2007) 165 FCR 57
Re Skiba v Federal Commissioner of Taxation (2007) 67 ATR 682
Stevens v Brodribb Sawmilling Co Pty Ltd (9186) 160 CLR 16
Queensland Stations Pty Ltd v Commissioner of Taxation (1945) 70 CLR 539

Vabu v Commissioner of Taxation (1996) 96 ATC 4898

REASONS FOR DECISION

Professor R Deutsch, Deputy President

11 June 2015

1. This case raises the question as to whether the Respondent was correct in refusing to make a personal services business determination (PSBD) in respect of the Applicant pursuant to section 87 – 65(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

2. The Applicant applied for the PSBD on the basis that it met the first alternative in subsection 87 – 65(3A) of the ITAA 1997, in that the Applicant could reasonably have been expected to meet or met the results test as provided for in subsection 87 – 18(3) of the ITAA 1997.

   THE RELEVANT FACTS

3. The Applicant entered into three separate agreements with a company called BSI Contracting Pty Ltd (BSI Contracting) under which the Applicant would provide to the Australian Securities Investments Commission (ASIC) certain project management services.

4. Mr Prasad, the Applicant’s only director argued the case for the Applicant before this Tribunal. Mr Prasad was the person who performed the services that the Applicant was required to provide under the three agreements in question.

5. The operative provisions of the three agreements were broadly identical. There were some definitional differences but it will be assumed for the purposes of this decision that all the provisions are identical unless otherwise specified.

6. Clause 1 of each of the agreements explained the role to be played by Mr Prasad and provided, in particular, as follows:

   ·the Applicant would provide the Key Person to perform the Role. In each case the Key Person was named as Mr Prasad and the Role was described as project manager. In two of the three agreements, significantly more detail was added to the description of the Role.

   ·unless otherwise agreed by BSI Contracting and ASIC, no person other than Mr Prasad could perform the role of Project Manager (the Role);

   ·the Role was to be performed at ASIC’s Sydney office;

   ·Mr Prasad would ensure that he performed the Role in accordance with the requirements of BSI Contracting;

7. Clause 4 together with Schedule 1 of each of the agreements dealt with payments and related matters and provided, in particular, as follows:

   ·in consideration of Mr Prasad performing the Role and subject to various invoicing and timesheet requirements, BSI Contracting must pay to the Applicant the fee as calculated at the Rate;

   ·the  Rate was $1,000 per day plus GST;

   ·payment was to be made fortnightly;

   ·the Applicant would ensure that Mr Prasad would record all time spent performing the Role in a timesheet in a form approved by ASIC and signed by an authorised representative of ASIC at the end of each week;

   ·the Applicant would issue tax invoices for its services.

8. Clause 8 dealt with termination of the agreements and provided that:

   ·during the first two weeks of the Term (essentially in each case a six-month period), BSI Contracting could terminate the relevant agreement at any time without cause and with immediate effect. If it did so, BSI Contracting would be required to pay to the Applicant the fees for work performed up to the time of termination but nothing further;

   ·after the first two weeks of the Term, BSI Contracting could terminate the relevant agreement at any time without cause. If it did so, BSI Contracting would be required to give to the Applicant what amounts to a 4 week notice period or in lieu thereof it would be required to pay to the Applicant the fees for the amount of work it would have performed during that relevant four week period;

   ·BSI Contracting could also immediately terminate the relevant agreement on various specified grounds. Most particularly this included Mr Prasad’s failure to perform the Role to the satisfaction of BSI Contracting and ASIC, for serious or wilful misconduct and for a refusal to comply with any law, request, procedure or direction of BSI Contracting and ASIC.

9. Clause 10.2 dealt with insurance and provided that the Applicant must effect and maintain  public liability insurance for a minimum amount of $5 million, professional indemnity insurance for a minimum amount of $1 million and workers compensation insurance specifically to cover the Key Person, namely Mr Prasad.

10. Clause 10.4 dealt with damages that may arise and provided that the Applicant must indemnify BSI Contracting against damage, loss or liability suffered by BSI Contracting in respect of the relevant agreement except where the loss or liability is caused by the negligence or act of BSI Contracting.

11. The relationship between BSI Contracting and the Applicant was described as one in which BSI Contracting appointed the Applicant as an independent contractor and the parties did not intend to create a relationship of employment agency of partnership between the Applicant and BSI Contracting or ASIC.

12. On 7 May 2013 the Applicant lodged an application pursuant to section 87 – 70(1)(a)  of the ITAA 1997 in which the Applicant sought a PSBD on the basis of the results test with respect to the 2012 income year.

13. On 5 June 2013, the Respondent refused the application on the basis that the Applicant failed to meet the results test as provided for by section 87 – 18(3) of the ITAA 1997 because:

    a)Mr Prasad’s income was not for producing a result (s 87-18(3)(a));

    b)the Applicant was not required to supply plant and equipment or tools of trade needed to perform the work from which the Applicant produced the purported result (s 87-18(3)(b);

    c)the Applicant was not and would not be liable for the cost of rectifying any defect in the work performed (s 87-18(3)(c)).

14. On 3 September 2013 the Applicant lodged an objection.

15. On 9 January 2014, the Respondent disallowed the objection in full on the primary basis that Mr Prasad’s income was not for producing a result.

    LEGISLATION

16. The relevant legislation is contained in 4 subsections which are worth quoting in full.

17. Section 87 – 65(1) of the ITAA 1997 reads:

    Making etc. personal business determinations

    
    

    (1)  The Commissioner may, by giving written notice to a *personal services entity whose *ordinary income or *statutory income includes some or all of an individual’s *personal services income:

    (a)  make a personal services business determination relating to the individual’s personal services income included in the entity’s ordinary income or statutory income; or

    (b)  vary such a determination.

18. Section 87 – 65(3) of the ITAA 1997 reads:

    Matters about which the Commissioner must be satisfied

    
    

    (3)  The Commissioner must not make the determination unless satisfied that, in the income year during which the determination first has effect, or is taken to have first had effect, the conditions in one or more of subsections (3A), (3B), (5) and (6) are met.

19. Section 87 – 65 (3A) of the ITAA 1997 reads:

    First alternative——results, employment or business premises test met or reasonably expected to be met

    (3A)  The conditions in this subsection are that:

    (a)  the entity could reasonably be expected to meet, or met, the results test under section 87‑18, the employment test under section 87‑25, the business premises test under section 87‑30 or more than one of those tests; and

    (b)  the individual’s *personal services income included in the entity’s *ordinary income or *statutory income could reasonably be expected to be, or was, from the entity conducting activities that met one or more of those tests.

20. Section 87 – 18(3) of the ITAA 1997 reads:

    (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.

    ISSUE

21. The primary issue before the Tribunal is whether the Respondent was correct in refusing to make a PSBD in respect of the Applicant. In determining this issue, the first question that the Tribunal must answer is whether the Applicant’s income was for producing a result (s87 – 18(3)(a)).

22. If it was not for producing a result the Respondent must prevail.

23. If it was for producing a result, the Respondent further argues that the Applicant was not required to supply the plant and equipment or tools of trade which are needed for Mr Prasad to perform the work which produced the result. In other words, even if the Applicant succeeds in demonstrating that Mr Prasad’s income was for producing a result, the Respondent contends that the Applicant will still be unsuccessful if it cannot show that it was required to supply the necessary plant and equipment etc (s87 – 18(3)(b)).

24. The final question is whether the Applicant was liable for the cost of rectifying any defect in the work performed (s87 – 18(3)(c)). This only needs to be considered if the Applicant succeeds in relation to the first 2 matters considered above.

    THE APPLICANT’S CONTENTIONS

25. The Applicant contends that:

    ·the agreements were to produce deliverables in respect of three projects each with their own beginning and end dates;

    ·each project had an approved budget that included the cost of Mr Prasad’s cross sites project management services. The total cost is factored in the setting of a daily rate and length of term of each agreement;

    ·it was not good commercial practice to be paid at the end of each job in case of disputes and disagreements. Rather progress payments were to be made to the cash flow benefit of each party;

    ·the Applicant provided Mr Prasad with a computer printer, laptop, mobile phones, broadband stalls, modems, cables, projectors, computer applications and specialised software to be used for the projects which Mr Prasad delivered to ASIC;

    ·the agreements were only extended to the Applicant on the condition that it carry professional indemnity and public liability insurances.

    THE RESPONDENT’S CONTENTIONS

26. The Respondent contends that Mr Prasad’s income was not for producing a result and in doing so focuses on a number of matters that arise from the agreements and the conduct of the Applicant and Mr Prasad. Essentially the Respondent contends amongst other things that the Agreements were not result based contracts which secured a negotiated contract price for a result achieved, but rather what amounted to a contract for services provided by Mr Prasad in return for an agreed fee of $1000 plus GST per day.

    THE TRIBUNAL’S CONSIDERATION

27. The Tribunal’s attention was drawn to a number of key aspects of the arrangements in question. These matters are particularly relevant to the determination of this case.

    Key Man

28. The Applicant was required under the terms of the Agreements to provide Mr Prasad to perform the designated roles under the Agreements. No one else could perform those roles unless BSI Contracting and ASIC agreed in writing.

    Day Rate

29. The payment for the performance of the services was $1000 plus GST per day and this would be calculated solely by reference to the number of days worked by Mr Prasad and nothing else.

    No Result Needed

30. The amount derived under the Agreements in no way reflected the achievement of any identifiable result. There was no contingency based fee that would vary depending on the success or failure of the projects involved.

    No Specified Deliverable

31. The amount derived under the Agreements did not hinge on the completion of any specified deliverables or milestones.

    Termination Arrangements

32. If any of the Agreements were terminated within the first two weeks of the agreed term, in each case the Applicant was entitled to and could sue for payment for the work performed up to the time of termination. 

33. If any of the Agreements were terminated after that two week period, the Applicant would be entitled to four weeks notice during which time the Applicant would be paid the Rate for each day worked by Mr Prasad. In lieu of such notice the Applicant would be paid a fee for the amount of work it would have performed during the notice period calculated on the assumption that work was carried out for 8 hours a day 5 days a week.

    Nature of the Work

34. The work that was to be conducted by the Applicant was essentially making Mr Prasad available to carry out certain identifiable tasks as a project manager.

    The Importance of the words “for producing a result”

35. Critically, the relevant legislative formulation requires that the income must have been “for producing a result”.

36. The exact meaning of the phrase “for producing a result” has been the subject of some discourse.

37. Thus, in Re Skiba v Federal Commissioner of Taxation (2007) 67 ATR 682, Senior Member Sweidan commented that:

    “The words “producing a result” require something more than obtaining a payment reward for providing ongoing personal skills and efforts to enable another party to produce a contract of for result to their clients. Consistent with the recognised indicia of the independent contractor, the words “for producing a result” require that the personal services income of the individual was paid to him as the contract quid pro quo for producing a result and was not paid until and unless the result was produced.”

38. Furthermore, in a number of cases, admittedly in somewhat different legislative contexts, it has been noted that a result based contract usually has the negotiated contract price for the result achieved and is not merely an hourly rate for hours worked : Hollis v Vabu Pty Ltd 2001 ATC 4508; Vabu Pty Ltd v Commissioner of Taxation (1996) 96 ATC 4898; Stevens v Brodribb Sawmilling Co Pty Ltd (9186) 160 CLR 16; Queensland Stations Pty Ltd v Commissioner of Taxation (1945) 70 CLR 539.

39. Having regard to these comments it is clear that the remuneration in question in these proceedings were not “for producing a result” as required by the terms of subsection 87 – 13(3)(a) because:

    ·in respect of each of the three contracts they were designed to remunerate only for the time spent by Mr Prasad working on the projects;

    ·while the work carried out by Mr Prasad was directed towards the production of a result, the entitlement to receive income was not dependent upon the production of a result;

    ·the Applicant’s income was based solely on the number of days that were worked by Mr Prasad. There were no contractual requirements to attain specific milestones or deliberate deliverables in order to qualify for the remuneration;

    ·if notice was given to terminate the contract prior to the completion, the Applicant remained entitled to payment for work done by Mr Prasad up until the point of termination. There was no entitlement to compensation beyond the four week period if the contract was terminated prior to completion of the project.  

40. Having regard to the above, it is evident to this Tribunal that essentially what occurred here is that the Applicant was contracted to provide Mr Prasad’s services as a task specific project manager to BSI Contracting for an amount that was determined by reference to an agreed fee of $1000 per day plus GST for every day worked by Mr Prasad. If Mr Prasad did not work, the Applicant did not get paid. If he did work, the Applicant would be paid at the agreed rate.

41. Further underscoring this reality is the fact that under the termination arrangements, the Applicant was paid an amount to reflect the work carried out by Mr Prasad – nothing more and nothing less. The agreements could be terminated without the Applicant completing any desired result and still be fully remunerated for the work done. In essence, the income was not derived for producing a result.

42. The Applicant contended that each project had an approved budget and that therefore a result was desired and expected. There does appear to have been a budget mechanism and in final submissions provided to the Tribunal after the hearing some global numbers for each of the agreements was provided. However, while those numbers were cross-referenced to the T-documents the numbers themselves do not appear in the signed agreements. If anything it seems that those budget figures were used by ASIC as control mechanisms, but they did not define the amount to be paid to Mr Prasad or to the Applicant. Rather the Applicant would be paid the agreed rate of $1000 plus GST per day worked by Mr Prasad. That arrangement can hardly be described as one in which a result is required to be achieved before a payment would be made. It is simply designed to give ASIC some sense of the likely overall project costs but does not in any way dictate a required result in order for payment to be made.

43. Accordingly, although the work in question involved identifiable tasks and responsibilities, in substance the income derived was not for producing a result but for work which was carried on by an individual as a project manager. That work produced certain deliverables as a necessary consequence of the work of a project manager. Just because deliverables existed does not convert the arrangement into one in which income is earned for producing a result. Rather, the project management skills are provided on a day by day basis and compensated on a day by day basis irrespective of whatever result may be achieved.

44. Having said that, the Agreement could be terminated but in that event payments would nonetheless be made in respect of the days worked or a payment in lieu would be made based on the number of days that would have been worked in the notice period.

45. This kind of arrangement has little to suggest an outcome based on results as required by the legislation. It is no doubt the case that all the work carried out was directed towards the production of a result, namely the effective and smooth management of the projects in question, but the entitlement to receive the income was not dependent on the production of a specific result. The Applicant’s income was based solely on the number of days worked by Mr Prasad.

46. The failure of the Applicant to demonstrate that its income is for the production of a result is fatal to the Applicant’s request for a PSBD. A determination cannot be made where the Applicant is unable to demonstrate that its income is from producing a result within the meaning of subsection 87 – 18(3).

47. Accordingly, it is not necessary for the Tribunal to consider the elements in subsections 87 – 18(b) and (c), because the three elements in subsection 87 – 18(3) that comprise the results test are conjunctive: IRG Technical Services Pty Ltd v Deputy Commissioner of Taxation (2007) 165 FCR 57.

    DECISION

1. The decision under review is affirmed.

I certify that the preceding 48 (forty -eight) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President

...................................[sgd].....................................

Associate

Dated 11 June 2015

Date(s) of hearing	17 April 2015
Date final submissions received	8 May 2015
Advocate for the Applicant	Mr R Prasad
Solicitors for the Respondent	Ms V Hammond, Australian Taxation Office