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Federal Court rules on personal services income cases


Personal services income rules have been thrust into the spotlight recently, with the Federal Court handing down a favourable and unfavourable decision to the commissioner this week.

By Jotham Lian 10 minute read

In Fortunatow v Commissioner of Taxation [2019] FCA 1247, the Federal Court allowed for the taxpayer’s appeal, setting aside the Administrative Appeals Tribunal’s (AAT) earlier decision that the taxpayer did not pass the “unrelated clients test”.

The taxpayer had not included the PSI in his assessable income by contending that he was not required to do so because the company conducted a personal services business by meeting at least one of the four personal services business tests, including the “unrelated clients test”.

The court found that the AAT had misconstrued the “unrelated clients test” and had applied “too broad a view of the meaning and effect of section 87-20(2) of the 1997 Act”.

It found that the ATO and the AAT had applied an exception for services provided through intermediaries too broadly and instead preferred a narrow interpretation of the exception.

“In my view, that provision is not engaged in circumstances where there is evidence that the taxpayer or personal services entity advertises to the public or a part thereof, and is also available to provide personal services through a recruitment or other similar intermediary agency,” Justice John Griffiths said.

“Simply because an individual or personal services entity is able to provide services through an intermediary, such as a recruitment or similar agency, does not constitute the making of an offer or invitation for the purposes of [section] 87-20(1)(b). More than that is required for the purposes of the unrelated clients test.”

The matter has now been referred back to the AAT to be reconsidered, with the ATO to consider the decision and whether an appeal is appropriate.

Results test                                                                           

In the matter of Douglass v Commissioner of Taxation [2019] FCA 1246, the Federal Court confirmed that the taxpayer did not meet the “results test”.

To pass the “results test”, at least 75 per cent of the individual’s personal services income is required to produce a result, where the individual supplies all the required “tools of trade” and is liable for rectifying defects in the work.

The taxpayer argued that the “results test” is still satisfied even if they do not get paid for achieving a result, provided they can show this is the custom or practice of independent contractors in their industry.

The Federal Court rejected this, agreeing with the ATO’s earlier determination. The ATO applied the PSI laws to tax Mr Douglass’s contract income as his own income rather than income split through a partnership with his spouse, which also meant certain deductions were not allowable.

The Federal Court also affirmed the imposition of penalties for recklessness, noting that the tribunal had previously found that the taxpayer’s failure to include income in his returns “merits characterisation as gross carelessness” and his subjective view as formed from a “self-interested misunderstanding of the legislative provisions”.

The ATO’s view

“The ATO supports partnerships and all legitimate business structures where legal and arising from a business structure of substance. The ATO recognises that a personal services business can exist where the results test is met. In such cases, the income is derived by the business entity and not the individual who carried out the work,” the Tax Office said in an online update.

“Taxpayers may choose to self-prepare returns or engage a professional adviser. In either case, it is vital to understand how the PSI provisions apply to individual circumstances.

“The ATO encourages anyone seeking to enter into or change their personal arrangements to contact them or seek experienced professional advice.”

Jotham Lian

Jotham Lian


Jotham Lian is the editor of Accountants Daily, the leading source of breaking news, analysis and insight for Australian accounting professionals.

Before joining the team in 2017, Jotham wrote for a range of national mastheads including the Sydney Morning Herald, and Channel NewsAsia.

You can email Jotham at: This email address is being protected from spambots. You need JavaScript enabled to view it. 

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