Scenario 1:
Company X signs a Contract with Company Y to provide consulting services. The contract states the billing is on an hourly basis, Company X is taking all the risk, and the contract also states that they may not be paid if there are issues with the work (i.e. if their end client refuses to pay due to mistakes or poor quality, then they won't pay either); it doesn't name any specific staff/people. It's a contract between the two companies for the provision of services.
Company X charges Company Y $110/hr for the service. Meanwhile, Company Y is charging their client $130/hr for the service (for example, in this scenario, in reality, what Company Y is charging isn't visible to Company X - it's none of their business it's just to illustrate the fact the two companies need to do this in order to be commercially viable). Company X hires an employee to provide the services to Company Y. The employee is paid $90/hr by Company X inclusive of super.
The employee is an arms-length employee. They have no involvement, ownership, or relation to Company X. Company X and Y are also at arm's length; just to be clear, there are no shared directors or any relations of any form.
Let's say the employee does 400 hours of work under this scenario. Company Y is charging their client $52,000, Company X is charging Company Y $44000, and Company X pays the employee $36000 inclusive of tax and super.
Interpretation:
- The income Company X earns from Company Y ($8000) for providing services is business income. It is not considered PSI because it is earned by the company as a result of a business contract, and Company X bears the risk of the contract. It's generated by the business structure and is payment for value addition beyond individual effort provided by Company X, which could involve supplying tools and equipment, arranging the services, managing the contracts, bearing the risks, providing support, intellectual property (processes/trade secrets), marketing, branding, goodwill, insurances, etc.)
- The employee hired by Company X to perform the work is paid a salary or wage of $90/hr (including super if applicable), and Company X withholds the relevant tax per the ATO tax tables/PAYG process. These payments to the employee, ATO and employee's super fund are a business expense for Company X.
- The employee's income from Company X is standard employment income (salary/wages), not PSI (unless they were a sole trader, company or trust, which we will get to later, but for now, assume they aren't).
- Reporting/Compliance: For Company X, the income from Company Y should be reported as business income. The wages/salary/super/tax paid to the employee/ATO/superfund are a deductible business expense. The employee reports their wages as employment income and pays all relevant taxes on them.
- There are no specific PSI reporting requirements for either Company X or the employee in this scenario.
In summary, in this scenario, there is no PSI involved for either Company X or its employee - neither is a PSE in this scenario. The arrangement is a standard business operation with an employer-employee relationship.
Scenario 1a:
Now, if the employee were to instead operate as an independent contractor, for example, then the employee (if they can't pass the PSB tests) would be a PSE, and they would need to review the PSI rules and meet any obligations they may have concerning the income ($90/hr) they are receiving from Company X (pay tax, limit deductions, no income splitting, trust distribution, etc.).
Company X isn't a PSE in this scenario either, as the income they are receiving (the $8000) is generated by the business structure and is not PSI.
Can you please confirm that the above is correct.
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