Personal services income or the PSI rule has been a hot topic as the Federal Court recently handed down its ruling on two cases relating to PSI rules, one of which is Fortunatow v Commissioner of Taxation.
In Fortunatow v Commissioner of Taxation, Peter Fortunatow, the taxpayer, failed to pass the “unrelated clients test” in the earlier decision of the Administrative Appeals Tribunal or AAT. He did not include the PSI in his assessable income. His contention was that he was not required to declare the PSI since the company conducted a personal services business. He claimed that the company was able to meet one of the four personal services business tests, which included the “unrelated clients test”.
Peter is a business analyst. Through contracts between the Company and various recruitment or similar agencies, he was engaged to provide services to organisations such as government departments, utilities, defence contractors, universities, banks and large corporations. In the taxation years 2012 and 2013, income of approximately $166,000 and $121,000 respectively was returned in the Company’s income tax returns. The income related to the provision of the taxpayer’s personal services to eight different end clients during those two taxation years. No remuneration was paid by the Company to the taxpayer and he returned no income in his personal income tax returns for the relevant years.
The Company transferred income generated by the taxpayer’s personal services to the Fortunatow Family Trust which was characterised as “management fees” payable to the Family Trust. These fees were claimed as deductions and had the effect of reducing the Company’s taxable income to nil. The Trust income was offset against the Trust’s rental losses. As the Commissioner pointed out, the end result of this structure was that none of the taxpayer, the Company or the Family Trust paid tax on the income generated by the supply of the taxpayer’s personal services as a business analyst in the two relevant taxation years.
The Federal Court found the ATO and AAT had applied an exception for services provided through intermediaries too broadly. The Court preferred a narrow interpretation of the exception. This matter has now been referred back to the AAT to be reconsidered.
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