In a recent case, the Administrative Appeals Tribunal (AAT) has found that an IT consulting services company did not satisfy the ‘personal services business' test and, as such, the company's income was assessable income for each of the individual contractors.

The taxpayer established a company to provide IT consulting services and technicians. The company's four technicians were contracted to external entities to work on a full-time basis. For the income years ended 30 June 2002 and 30 June 2003, the company derived total fee income of almost $1 million.

As the result of an audit in 2004, the Tax Office declared that the company was not a personal services business, as it did not pass any of the personal services business tests. The Tax Office subsequently reassessed the company's fee income for each of the company's four technicians.

The personal services income (PSI) tests are designed to prevent individuals from alienating income generated from personal services through another entity.

The AAT held that the relevant service contracts did not pass the results test as they were more in line with employment contracts, as each technician was paid an hourly rate and there was no contracted result or outcome.

None of the remaining three tests could be satisfied as each consultant derived 100% of their income from one source, thus not satisfying the 80% requirement. Consequently, the AAT affirmed the Tax Office's amended assessments and the taxpayer's appeal was dismissed.