PSI rules: taxpayer LinkedIn but unconnected to clients


Posted By on 8/01/19 at 2:08 PM

Many professionals regularly use the business-focused social networking site of LinkedIn to promote custom for themselves.  The taxpayer in Fortunatow and FCT [2018] AATA 4621 failed to establish that his company was conducting a personal services business (PSB) under Divs 84 to 87 of the Income Tax Assessment Act 1997 (ITAA 1997) for the dispute years 2012 and 2013. This was despite his arguments that his extensive use of the company’s LinkedIn site entitled him to rely on the commonly utilised “unrelated clients test”. Consequently, the income generated by the taxpayer’s personal efforts and skills was assessed to him (with a recklessness penalty of 50% maintained).


The taxpayer was a senior business analysist who supplied his services via intermediary IT/HR recruitment firms and larger head contractors for major companies and government departments. This was done ostensibly though his company, as its sole director. The client/end user would put their project requirements to the intermediary and the latter would normally put forward their 3 recommended contractors to the client. The client would then make their own enquiries about work experience history and skills, often through LinkedIn profiles. The taxpayer maintained a LinkedIn profile of his company which detailed its “availability for projects and assignments”.

If selected by the client, the intermediary would be contractually engaged by the client and the intermediary would under a separate contract engage the company for the project – usually on an hourly basis on a “back to back” basis with the intermediary retaining its margin. No express or implied contract existed between either the taxpayer or the company on the one side and the client on the other. There were 8 relevant contracts entered into by the company with intermediaries in the dispute years.

The taxpayer’s then current accountant and bookkeeper advised him to have his family trust invoice the company for management services. The taxpayer was not paid by the company for his services and so the company, the family trust and the taxpayer all lodged nil tax returns. The decision did not spell out whether the family trust distributed its net income to beneficiaries (if in fact a distribution did occur in the absence of, say, available trust losses) and what, if any, consequential adjustments were made to the income tax assessments of family trust beneficiaries as a result of the personal services income (PSI) assessments being upheld.

The taxpayer asserted that the company satisfied 2 of the 4 PSB tests (in s 87-18 of the ITAA 1997) available to establish a PSB, namely the results test and the unrelated clients test.

Results test

With the results test, the taxpayer had to establish under ss 87-18(3) and (4) that:

  1. the income was paid for producing a result;
  2. the company supplied the plant and equipment (eg laptop) needed to perform the work from which the company produces the result;
  3. the company was liable for rectifying any defect in the work performed; and
  4. in considering the above, regard is to be had to custom or practice in the industry of the contractor concerned.

The taxpayer argued that, although each of the 8 contracts provided for an hourly rate of pay and remuneration on a weekly or fortnightly basis, this was only done “so as to facilitate cash flow”. His witness testified that business analysts are usually contracted for a specified time to achieve a particular outcome or result within the scope of the project. The contracts often do not specify in writing the results expected, but defined results are stated in face-to-face discussions with both the recruiters and the client. The Tribunal accepted that “the terms of written contracts are not irrelevant but are not determinative”: paras 43 and 44.

The Tribunal however, quoted and adopted the reasoning in the Explanatory Memorandum introducing the PSI legislation as follows:

“An individual will not satisfy the… (results)..test… merely because the contract states that the personal services income is for producing a result. The individual must actually be paid on the basis of achieving a result, rather than, for example, for hours worked. For example, if a management consultant’s contract requires the consultant to produce a report but he or she is paid according to the hours worked, not a price for the report, the consultant will not satisfy this condition”.

The Tribunal held the evidence presented by the taxpayer “….is entirely consistent with an arrangement by which the applicant is paid for the hours he worked as opposed to being paid for achieving a result ..” and “… does not establish an industry custom or practice of payment being conditional upon achieving a result”: paras 49-51.

The Tribunal went further and said even if the above 2 conditions for the results test were satisfied, there was no provision in any of the 8 contracts which required the Company to rectify defective work done. It noted in one case, where the service contract was terminated early for allegedly defective work by the taxpayer, it was still paid for time recorded up until the termination date: para 52.

Unrelated clients test

This test is set out in s 87-20(1) as follows:

“An individual or a personal services entity meets the unrelated clients test in an income year if:

(a) during the year, the individual or personal services entity gains or produces income from providing services to 2 or more entities that are not associates of each other, and are not associates of the individual or of the personal services entity; and

(b) the services are provided as a direct result of the individual or personal services entity making offers or invitations (for example, by advertising), to the public at large or to a section of the public, to provide the services.”

The s 87-20(1)(b) requirement is further qualified by s 87-20(2):

“The individual or personal services entity is not treated, for the purposes of paragraph (1)(b), as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity.”

It was readily accepted that the subject services were provided to 2 or more unrelated parties in the requisite proportions.

So the taxpayer then had to prove that offers or invitations to the public at large or a section thereof were made, the services provided to the unrelated clients were provided as a direct result of those offers or invitations – and were not made “merely” through any intermediary.

The taxpayer argued his active profile on LinkedIn and his marketing by word of mouth at industry functions satisfied the offer or invitations element of this test. The Tribunal accepted the company’s updated profile (without commenting on the “word of mouth” argument) was sufficient to constitute advertising to at least a section of the public.

Clearly, the procurement of the company’s 8 contracts through intermediaries remained a problem under s 87-20(2).

However, the taxpayer argued the word “merely” in that subsection meant it did not apply to the company – as the company’s active profile mean it relied on that advertising as well and not “merely” on recruitment firms and intermediaries to procure clients for the subject services.

The Tribunal disagreed, stating:

“In effect, the applicant received referrals from intermediaries and allowed those intermediaries to take responsibility for obtaining and dealing with customers. This is not the conduct of a genuine business operating as an independent contractor because the clients are referred from a recruitment company which then takes responsibility for those clients by contracting with them. It would be a perverse result and be contrary to the object of Division 87 if s 87-20(2) did not operate due to the applicant’s advertising beyond the intermediaries, despite that advertising having no material causative effect on the work being provided.

All of the work obtained … in the two relevant years was through an intermediary….In other words, the applicant is deemed to have not made the offer or invitation that is required to satisfy s 87-20(1)(b) because of the involvement of the intermediary. Consequently, the applicant fails to satisfy the unrelated clients test.

The taxpayer’s further arguments concerning the company’s LinkedIn profile constituting a direct link between it and the client/end user were rejected due to a lack of timely and cogent evidence being presented to the Tribunal showing clients directly contracting with the taxpayer’s company through the pull of the LinkedIn profile. Absence such evidence, the taxpayer’s argument concerning the profile’s clear direct link to all the intermediaries failed s 87-20(2).


This case highlights the difficulties for high income earning contracting individuals who use the pervasive reach of recruitment/HR firms to effectively assign all or part of personal service income and the resulting tax liability to a lower taxed associated partner, company or trust beneficiary due to the PSI rules. That is the case even without also considering the anti-avoidance provisions of Pt IVA.

In passing, one could validly question the Tribunal’s restrictive interpretation of the word “merely” in s 87-20(2) – which substantially undermined the best of the taxpayers unrelated clients test arguments. The factual and hence evidentiary difficulties in this case in establishing the necessary causal direct links between self-promotion and work produced thereby illustrate a number of important points.

  • If in doubt, an affected taxpayer should consider making a written application to the ATO for a PSB determination.
  • The contracts and arrangements of clients who believe they conduct a genuine PSB should be carefully reviewed and, if any material doubt remains, seriously consider obtaining a PSB determination. Also, reflection on the timing of a concurrent comprehensive voluntary disclosure to eliminate or substantially reduce penalties and interest should the application be rejected comes into sharp focus.
  • If commercially prudent (apart from tax) and the services income is substantial, for future years a taxpayer may consider actually using business premises to conduct all or part of the personal service entity’s commercial activities (even if those premises are relatively modest in cost). A taxpayer may still frequent and extensively use various client/end user premises to complete most of its assignments. However, eligibility requirements for this test include exclusive and impliedly actual use of the business premises – which must be separated from home and the client/end user premises. Further, qualifying business premises must be used “mainly” for those commercial activities. Putting up a shingle for a cheap office and never materially using them for assignments will not satisfy this test.

Separately, there are many sole practitioners, doctors, dentists, accountants, lawyers, physiotherapists and allied medical professionals, IT professionals and other consultants who would fail the tests in Rulings IT 2503 and IT 2639. Typically, they do not engage at least one fulltime colleague as a separate profit centre who may conduct their income producing activities through a personal service entity such as a company or trust. The case illustrates that they may not currently satisfy the PSB rules. With the corporate tax rate now at 27.5% compared with the top marginal rate of 47%, the attraction to restructure to use a personal service entity or maintain it for income splitting should be carefully considered, albeit in light of the above and other risks.

Finally, the primary liability for negligent advice in these circumstances normally falls on the tax agent with the derivative risks of not only damages claims, but licensing issues occasioned by the usual report to the Taxation Practitioners Board of such Tax Agent conduct by the ATO.

An egregious outcome, indeed!

This article first appeared in Thomson Reuters Weekly Tax Bulletin No 1 of 2019. 

KHQ Lawyers - Jack Stuk

Jack Stuk Principal Solicitor

Jack is a highly skilled and experienced taxation lawyer, proficient in advising on complex tax issues for high net worth individuals, and across business, commercial and estate matters.

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