On 17 August 2020, the Full Federal Court handed down its decision in FCT v Fortunatow [2020] FCAFC 139 allowing the Commissioner’s appeal from the decision of Griffiths J of the Federal Court and finding Griffiths J had erred in his construction of section 87-20(1)(b) of the Income Tax Assessment Act 1997 (ITAA 97).
The Full Federal Court held that the taxpayer, Mr Fortunatow, did not satisfy the “unrelated clients test” under the personal services income (PSI) provisions.
The taxpayer was a business analyst and sole director of Fortunatow Pty Ltd (Company). Through contracts between the Company and recruitment or similar agencies, the taxpayer was engaged to supply services to various clients.
In the income years ended 30 June 2012 and 2013, the Company received income of $166,648 and $121,443 for the provision of the taxpayer's personal services. The taxpayer did not receive any remuneration from the Company and reported no taxable income for the relevant years.
The Commissioner included the income of the Company in the taxpayer's assessable income on the basis that it was PSI and the company was not conducting a personal services business within the meaning of section 86-15(3) of the ITAA 97. The taxpayer sought review by the Administrative Appeals Tribunal (AAT) arguing that the Company was conducting a personal services business.
One of the tests for conducting a personal services business is the “unrelated clients test” in section 87-20 of the ITAA 97.
The taxpayer argued maintaining a LinkedIn profile identifying his past experience and skills and information as to his availability constituted the making of an offer or invitation to the public within the meaning of section 87-20(1)(b). That section requires services are provided as a direct result of the taxpayer or company making offers or invitations to the public at large (or a section of it) within the meaning of section 87-20(1)(b).
The AAT found that the “unrelated clients test” in section 87-20 was not satisfied. While the AAT accepted the taxpayer's advertising on LinkedIn constituted the making of an offer or invitation, it held that section 87-20(1)(b) was not met due to the operation of section 87-20(2). Section 87-20(2) says an entity is not treated as making offers or invitations merely by being able to provide services through an intermediary, such as a recruitment agency, that conducts a business of arranging for persons to provide services to clients of the entity.
The AAT said that section 87-20(2) applied such that the taxpayer was not treated as having made offers or invitations for the purposes of section 87-20(1)(b) as the taxpayer's work was obtained through a recruitment agency.
The taxpayer appealed the AAT decision to the Federal Court. Griffiths J allowed the taxpayer's appeal, finding that the AAT erred in its construction of section 87-20(2) and its interaction with section 87-20(1)(b). Griffiths J held that the exclusion in section 87-20(2) was not engaged simply and only because personal services were available to be provided through an intermediary, where there was evidence that the individual or personal services entity had taken other steps to make offers or invitations to the public at large.
The Commissioner appealed the decision of Griffiths J to the Full Federal Court arguing an offer or invitation which is only made to an intermediary, that plays no part in a client's decision to procure the relevant services, cannot be said to have directly resulted in the provision of the services.
McKerracher, Davies, and Thawley JJ of the Full Federal Court jointly held the phrase “as a direct result” in section 87-20(1)(b) created a requirement for a direct causal connection between the services provided and the offer or invitation to the public.
An offer made to an intermediary which is not passed to, and plays no part in, the decision to procure the relevant services cannot be said to have directly resulted in the provision of the relevant services. The Full Federal Court found none of the clients of the taxpayer made their decisions to engage his services as a direct result of any offer or invitation constituted by his LinkedIn profile.
The decision of Griffith J of the Federal Court appeared to ‘broaden’ the scope of the unrelated clients test in section 87-20. The Full Federal Court overturned Griffiths J. Whether the Australian Taxation Office administers the test as it was before the commencement of this litigation, or the Full Federal Court decision results in a change, is unknown pending the possible release of a Decision Impact Statement by the ATO.
If you require advice in relation to application of the PSI rules or have any questions in relation to the above, please contact us:
Sam Campbell
Senior Associate | Business Law
M +61 423 515 454 | T +61 3 9611 0135
E: scampbell@sladen.com.au
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Rob Warnock
Principal Lawyer
T +61 3 9611 0155 | M +61 419 892 115
E: rwarnock@sladen.com.au
