On 12 August 2019, the Federal Court upheld the taxpayer’s appeal from the AAT, which had made an adverse finding, that the ‘personal services income’ (PSI) rules to assess the Taxpayer, to his companies’ consulting income – despite having 8 ultimate clients. The Court remitted the matter back to the AAT to be determined according to law.

See below for more detail about the case and a summary of the PSI rules and to this Tax Technical article for another PSI case, with a different result.

FJM 15.8.19

[Tax Month – August 2019]



The Federal Court has remitted to the AAT a decision that income derived by a business analyst, through a company, was subject to the personal services income (PSI) rules.

Through a company he controlled, the taxpayer provided his services to various large organisations such as government departments, universities, banks and utilities. In the 2012 and 2013 income years, the company disclosed income of approximately $166,000 and $121,000, respectively, from the provision of the taxpayer’s personal services to 8 different end clients. The taxpayer received no remuneration from the company.

The ATO applied Div 86 of the ITAA 1997 to include the income received by the company in the taxpayer’s assessable income for 2012 and 2013. The taxpayer, however, argued that Div 86 did not apply because the unrelated clients test in s 87-20 was satisfied and therefore the income was from conducting a personal services business.

In Fortunatow and FCT [2018] AATA 4621, the AAT decided that the taxpayer was not operating a genuine business as an independent contractor because he, in effect, received referrals from intermediaries (recruitment companies) and allowed those intermediaries to take responsibility for obtaining and dealing with customers.

The central issue was whether s 87-20(2) applied so the taxpayer would not be treated as having made offers or invitations to provide services to the public at large or a section of the public, by advertising on LinkedIn, because he was available to provide the services through recruitment companies.

The Federal Court held that the AAT had misconstrued s 87-20(2) and remitted the matter to the AAT for further reconsideration according to law. In the Court’s view, the exclusion or exception in s 87-20(2) did not necessarily apply where, in a case such as this, there was evidence that the taxpayer (or the company) advertised his services to the public or a segment of the public through a forum such as LinkedIn, and also obtained work through recruitment companies.

(Fortunatow v FCT [2019] FCA 1247, Federal Court, Griffiths J, 12 August 2019.)

[LTN 155, 14/8/19; Tax Month – August 2019]




The PSI rules are designed to address the tax results of what is sometimes called ‘sham contracting’ (ie. contracting that is in substance employment). It has 2 main focuses:

  1. First, to trim back deductions that a taxpayer might claim, for being a business, that wouldn’t be available if they were mere employees. This is under Div 85, unless the taxpayer was carrying on a ‘Personal Services Business’.
  2. Second, to avoid a taxpayer avoiding tax on the income for his/her personal efforts or skills (ie. ‘Personal Services Income’). This is under Div 86, but it does not apply to a ‘personal services entity’ that is carrying on a Personal Services Business (s86-15(3)).

‘Personal Services Business’therefore is an important term (Div 87).

  • The taxpayer must satisfy at least 1 of 4 tests of independence, if 80% or more of the individual’s income comes from the same source (s87-15(2)&(3)).
  • Those 4 tests are:
    • The ‘results test’(in s87-18) – which requires the income to have been paid for producing a result, for which the individual/entity would be liable to rectify (if there were a defect) and the individual/entity, supplied all the tools and other plant and equipment.
    • The ‘unrelated clients test’(in s87-20) – which requires the individual/entity to have advertised their services to the public, and have, as a result at least 2 unrelated clients (during the year).
    • The ’employees test’(in s87-25) – which requires the individual/entity to have engaged at least one other (unrelated) entity who/which does at least 20% of the individual’s/entity’s principal work for that year (measured by ‘market value’).
    • The ‘business premises test’(in s87-30) – which requires the individual/entity to conduct the activities (from which the PS income is derived) from business premises, to which the individual/entity has exclusive use and that are physically separate from privately used premises or premises of the client entity (and this is a whole of year test).





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