Testing the boundaries of what is a personal services business
The decisions in these two cases both relate to personal services income (PSI) and the operation of the personal services business tests.
In Douglass, the issue was whether the taxpayer satisfied the results test to be classified as personal services business.
In order to pass the results test you generally need to show that at least 75% of the PSI derived during the year passes all of the following three conditions:
The income is paid for producing a result;
The taxpayer is required to provide the tools / equipment required to perform the work; and
The taxpayer is liable for the cost of rectifying defects in their work.
The Douglass case focused on the interpretation of a specific phrase in the legislation relating to the results test. Subsection 87-18(4) basically states that when considering the three conditions referred to above you need to have regard to the custom or practice in the relevant industry when work is performed by contractors. The taxpayer argued that if there was evidence that this type of work would not generally be performed by an employee then the results test would be passed without having to work through each of the three specific conditions of the results test.
The Court dismissed this argument as a misstatement of the legislation and confirmed that all three conditions need to be considered regardless of whether it is typical for this type of work to be performed by a contractor.
Leaving aside the specific issue dealt with in this case, it serves as a reminder that the results test does contain three separate conditions that all need to be considered. Just because it appears that someone is being paid on a results basis is not sufficient on its own to pass the results test.
The Fortunatow case considered the operation of the unrelated clients test.
Broadly, in order to pass the unrelated clients test the taxpayer needs to have generated PSI from two or more unrelated clients during the year and the services need to have been provided as a direct result of the taxpayer making offers or invitations to the public or a section of the public.
This case focused on the second element of the test. When it comes to determining whether the services are provided as a result of offers or invitations to the public there is an exclusion which applies when the taxpayer provides services through an intermediary such as a recruitment agency or labour hire firm. Broadly, the exclusion operates such that the individual is not taken to have made offers or invitations to the public merely because they are available to provide services through the intermediary.
The Federal Court in this case held that the exception has no application where there is evidence that the taxpayer advertises their services to the public or a segment of the public and also obtains work through the involvement of a recruitment or other similar intermediary company. That is, the fact that someone has undertaken work obtained through an intermediary does not automatically prevent the unrelated clients test from being satisfied.
Again, this case serves as a reminder that the unrelated clients test has multiple element that need to be considered. It is not merely sufficient to show that work has been done for two or more clients. Consideration also needs to be given to how that work has been generated.