Fortunatow and Commissioner of Taxation (Taxation) - [2018] AATA 4621

Fortunatow and Commissioner of Taxation (Taxation) [2018] AATA 4621 (14 December 2018)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2017/3954
Re:Peter Fortunatow
APPLICANT

AndCommissioner of Taxation
RESPONDENT

DECISION
Tribunal:Deputy President Britten-Jones
Date:14 December 2018
Place:Adelaide

The decision under review is affirmed.
...............................[Sgnd].........................................
Deputy President Britten-Jones
Catchwords
TAXATION – Income tax – Part 2-42 of Income Tax Assessment Act 1997 – Personal services income – Personal services business – Results test – Unrelated clients test – Work carried out through a recruitment company or some other intermediary – Offers or invitations to the public by LinkedIn advertising – Applicant not treated as having made offers or invitations by operation of s 87-20(2) of Income Tax Assessment Act 1997 – penalties – Finding of recklessness under s 284-90(1) of the Taxation Administration Act 1953 – Decision under review affirmed.
Legislation
Income Tax Assessment Act 1997, Part 2-42, ss 87-10, 87-15, 87-18 and 87-20
Taxation Administration Act 1953, s 284-90(1)
Cases
BHP Billiton Direct Reduced Iron Pty Ltd v Duffus, Deputy Commissioner of Taxation [2007] FCA 1528
BRK (Bris) Pty Ltd v FCT [2001] FCA 164
Cameron v Commissioner of Taxation [2012] FCAFC 76
Federal Commissioner of Taxation v Yalos Engineering [2009] FCA 1569
Taneja and Commissioner of Taxation [2009] AATA 87
Secondary Materials
The Explanatory Memorandum to the New Business Tax System (Alienation of Personal Services Income) Bill 2000
The Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 2001
Income tax: what is a personal services business - Taxation Ruling 2001/8
REASONS FOR DECISION
Deputy President Britten-Jones
14 December 2018

This is a case about the personal services income regime in Part 2-42 Divisions 84 to 87 of the Income Tax Assessment Act 1997 (ITAA 1997), which applies to prevent individuals from reducing their tax by alienating their personal services income (PSI) to an associated company. The basic rule in subsection 86-15(1) is that an individual is required to include in his or her assessable income any income that another entity gains for the individual’s personal services. Where this regime applies the PSI will be included as assessable income of the individual whose personal efforts or skills generated the income, notwithstanding that the income may have been alienated to another interposed company.
The regime does not apply to PSI that is income from conducting a personal services business. There is no dispute between the parties in this case that the applicant has generated PSI and that he has done so through his company, Fortunatow Pty Ltd (the Company). The dispute arises because the applicant did not include the PSI in his assessable income; but he contends that he was not required to do so because the Company conducts a personal services business by meeting at least one of the four personal services business tests set out in s 87-15(2) of the ITAA 1997.
The relevant personal services business tests are the results test under s 87-18 and the unrelated clients test under s 87-20 of the ITAA 1997.
There are three main issues to be determined:
(a)Whether the applicant satisfies the results test;
(b)Whether the applicant satisfies the unrelated clients test; and
(c)What penalties, if any, should be imposed by the respondent?
BACKGROUND
The applicant is a business analyst and since 2015 he has been accredited with the International Institute of Business Analysts. His job is to come into medium to large organisations and address issues and make improvements with respect to technology, processes, systems and people. Typically he will be engaged for a specified task and there is an understanding that he is required to deliver a result within a certain timeframe.
Most work is carried out through a recruitment company or some other intermediary. For example, all work for the government in South Australia is provided through a panel of recruitment companies. The applicant is engaged by the recruitment company and there is no contractual relationship between the applicant as the contractor and the client as the end user of services.
The client provides the recruitment company with a high level job description and the recruitment company proceeds to find suitable candidates to carry out the required job. The recruitment company then presents to the client a choice of usually three recommended contractors. The client will then make their own enquiries, often through the LinkedIn profiles of those recommended contractors, so as to get their own understanding of the experience and work history of the recommended contractors. If a satisfactory candidate is put forward then the client will instruct the recruitment company to engage them.
LinkedIn is a business-focused social networking site that launched in 2003. Its main purpose is to help people network professionally. The site lets you find other business associates, clients, and colleagues whom you already know. You "connect" with them through the site, and they then become part of your network. Recruitment companies use LinkedIn to assist them to search for and investigate potential candidates.
The applicant maintained a LinkedIn profile on line for the Company which gave particulars of his past experience and skills. The applicant ensured that the profile was kept up to date and a note would be included on the profile that the Company would be available for a new assignment on a certain date, namely after completion of the current assignment. It included that he is “Available for projects and assignments requiring a Business Analyst or a combined Project Manager/Business Analyst role.”
Evidence for the Applicant
Oral evidence was adduced from the applicant and two other witnesses, Mr William Boran-Fogarty and Mr Ken Phillips (who also provided statutory declarations).
Mr Boran-Fogarty is a business analyst and project manager predominantly in the IT industry. He gave evidence as to his experience as both a contractor (the supplier of business analyst services) and a client (the consumer of those business analyst services). His evidence was largely uncontroversial.
Mr Phillips is the Executive Secretary of the incorporated association of Self-Employed Australia, previously known as Independent Contractors of Australia. There are numerous problems associated with the evidence of Mr Phillips. He was called by the applicant as an expert with respect to custom and practice of business analysts. He accepted that he had no experience with respect to this industry prior to being asked to assist by the applicant. He also accepted that as a board member of Independent Contractors of Australia he had acted as an advocate for the applicant in relation to his dispute with the Australian Taxation Office and that he has expressed strongly held opinions that self-employed contractors are treated unfairly by the Australian Taxation Office. For these reasons I am not prepared to give any weight to the opinions expressed by Mr Phillips. I note that in any event his evidence did not add much more in substance to the evidence about custom and practice given by the applicant and Mr Boran-Fogarty which is referred to below.
The applicant sought to rely upon letters he received from three recruitment companies which were attached to his statutory declaration dated 26 April 2018. No-one from these recruitment companies was called and the letters followed a standard format with wording that had been provided by the applicant by emails dated 13 April 2018.[1] Consequently, I give no weight to these letters. I note that in any event this evidence did not add much more in substance to the evidence about custom and practice given by the applicant and Mr Boran-Fogarty which is referred to below.
[1] Exhibit 12.
One week after the hearing had concluded on 9 October 2018, the applicant applied to adduce fresh evidence to attempt to address a deficiency in the evidence that had been identified by the respondent. The fresh evidence comprised a statutory declaration from the applicant dated 17 October 2018 which annexed email communications with clients to whom the applicant’s services had been provided. The emails recorded answers given by clients to questions framed by the applicant in a very leading manner. The respondent neither consented nor opposed the tender but submitted that little weight should be given to the answers from the clients. I admitted into evidence the statutory declaration with its annexures but I give it little weight due to the leading nature of the questions and because none of the clients gave evidence directly and therefore were not available for cross examination. I will refer to this evidence in more detail later in these reasons.
The Company’s Contracts
In the relevant financial years of 2012 and 2013 the Company entered into eight contracts (the Eight Contracts). The work was carried out by the applicant through the Company. The Company entered into a contract with the recruitment company or some other intermediary in order to provide its services to the client. The income generated from the Eight Contracts is the PSI at the centre of this dispute.
The first contract was with Hays (recruiting experts in information technology) for services provided to the University of Adelaide from March to July 2011. The applicant gave evidence as to how he got the work and said that:
I worked on a similar infrastructure project a few years prior and the agent [Hays] that put me forward knew that I had that experience and they arranged essentially a business meeting to discuss the project.[2]
Hays is kind of like a business partner. I considered them a business partner where we’re all connected via LinkedIn. They obviously know when there’s something available. They ring me.[3]
[2] Transcript 9 October 2018 p 90 line 35.
[3] Transcript 9 October 2018 p 91 line 33.
Following the introduction the applicant met with a representative from the University of Adelaide. Once the contract with Hays was entered into the applicant commenced working at the University with other members of the University and other independent contractors. He recorded his time on a weekly timesheet which was submitted to Hays and approved by the University of Adelaide. There was also a contract with CXC Agency Services Pty Ltd which was described as a sub-contracting agreement but was entered into primarily for the purpose of the Company obtaining professional indemnity insurance cover through the arrangement. CXC Agency Services would deduct 2% from the money paid by Hayes to the Company.
The second contract was with KDN Services Pty Ltd (KDN) (an IT company) for services provided to the Legal Services Commission from July to September 2011. As to how he got this job, the applicant gave evidence that “one of the directors from … KDN contacted me via LinkedIn.”[4] The applicant had been connected on LinkedIn with Domenic Novia from KDN for two years.
[4] Transcript 9 October 2018 p 95 line 45.
In the written contract with KDN there is a description of the required job and duties. It provides for an agreed hourly rate of $80 plus GST with the provision of a fortnightly invoice to be approved by the Legal Services Commission. The commencement date was expressed as 2 June 2011 but the expiration date in the contract was left blank. The Company was paid fortnightly by KDN. It was KDN’s responsibility to provide professional indemnity insurance.
The third contract was with Intec Group (who held themselves out as doing consulting, recruitment, development and training) for services to the Australian Submarine Corporation (ASC) from January to March 2012. The applicant gave evidence that he got this job because he knew two people who worked at Intec Group. The process by which the Company obtained this contract was a telephone call from Toby Williamson from Intec Group followed up by an email from him dated 21 December 2011 providing some background and details of the role. [5]
[5] Transcript 9 October 2018 p 97 line 43.
The applicant signed a written contract on 27 January 2012 providing for an hourly rate and weekly timesheets and fortnightly payments by Intec Group to the Company. Either party could terminate the contract by giving notice of two weeks.
The fourth contract was with Icon Recruitment Pty Ltd for services provided to ETSA from September 2011 to April 2012. As to how he got this job, the applicant gave evidence that “I got a phone call from the recruiter that was looking to fill a role on a project.”[6] Sonia Kaura, who had been acting on behalf of ETSA, said in her LinkedIn message that the applicant was recommended by a word of mouth referral from Greg Mattner (who had worked with the applicant on a project with SA Water).[7] Ms Kaura also said that she had viewed the applicant’s LinkedIn profile.
[6] Transcript 9 October 2018 p 99 line 20.
[7] Annexure I to the statutory declaration from the applicant dated 17/10/18.
The Company entered into a written agreement with Icon Recruitment dated 2 August 2011. The agreement was to terminate on 10 February 2012 and was initially for three days a week and then four days a week. The contract specified the services to be provided, the hours of work and the hourly rate of pay based on timesheets with payment to be made by Icon Recruitment after 10 days. The Company was obliged to maintain professional indemnity insurance and public liability insurance. The applicant obtained the necessary insurance through CXC.
The fifth contract was with Hays for the provision of services to the Department of Premier and Cabinet from March to July 2012. As to how he got this job, the applicant said “So that one came through Hays.”[8] Sam Ntafillis from the Department of Premier and Cabinet said in his email[9] that the applicant was engaged as a result of word of mouth representation but it is not known from whom. Mr Ntafillis said that he had looked at the applicant’s LinkedIn profile.[10]
[8] Transcript 9 October 2018 p 101 line 36.
[9] Annexure H to the statutory declaration from the applicant dated 17/10/18.
[10] Annexure H to the statutory declaration from the applicant dated 17/10/18.
The sixth contract was with Hays for the provision of services to Viterra from August to November 2012. The applicant was asked “How did you get that job? Was it a telephone call from Hays?” and he said “Yes.”[11] Paige Mower, who had been working at Viterra, said in her LinkedIn message[12] that it was someone from the Viterra safety team that recommended the applicant. Payment was weekly based on timesheets provided electronically.
[11] Transcript 9 October 2018 106 line 4.
[12] Annexure G to the statutory declaration from the applicant dated 17/10/18.
The seventh contract was with Talent International (SA) Pty Ltd (Talent) for services provided to the government Department of Health and Ageing from January to April 2013. The process by which the Company obtained the contract began with a contact from someone at Talent. The applicant’s evidence was that this job “would have come via Talent … So they would have rung me and said look, we’ve got a need, are you interested and then they would have put me forward.”[13]
[13] Transcript 9 October 2018 p 107 line 13 and line 16.
There was a written contract between the Company and Talent dated 20 December 2012 providing for a commencement date on 7 January 2013 and an end date on 5 April 2013 with likely extensions upon client approval. The contract could be terminated by either party upon immediate written notice. It provided an hourly rate of pay of $85. Talent had an online timesheet and recipient generated invoices. Payment was made on a fortnightly basis. The Company was required to maintain public liability and professional indemnity insurance.
The eighth contract was with RM Walters for the provision of services to Westpac from April 2013 to July 2013. The process by which the Company obtained the contract began with a contact from RM Walters via LinkedIn. The applicant gave evidence that he had never done any work for RM Walters and “I’m pretty sure they found me through LinkedIn.”[14] Mario Corena from Westpac said in his LinkedIn message[15] that the applicant had been recommended by word of mouth and that he had looked at the applicant’s LinkedIn profile.
[14] Transcript 9 October 2018 108 line 18.
[15] Annexure F to the statutory declaration from the applicant dated 17/10/18.
RM Walters had an online system through which timesheets were submitted for approval and then payment. The Company obtained its professional indemnity insurance for this contract through CXC Agency Services by sub-contracting agreement dated 22 April 2013.
In summary with respect to each of the Eight Contracts it was the applicant’s oral evidence that he obtained work as a result of a recruitment company or KDN contacting him and then putting him forward to the client for the job. The applicant generally maintained a relationship with these recruitment firms or intermediaries often through LinkedIn or as a result of past experience for the purpose of his Company potentially providing services to a client through them.
The written evidence from the clients attached to the statutory declaration from the applicant dated 17 October 2018 (referred to above) does not in any way diminish the primary role of the recruitment company in causing the work to be obtained and carried out by the applicant. That evidence suggests that the clients carried out their own LinkedIn checks or received word of mouth referrals about the applicant once his name was put forward by the recruitment company as a potential candidate. This is consistent with the evidence from Mr Boran-Fogarty about the practice within the industry. The clients were necessarily involved but the initiating contact was always from the recruitment company or intermediary and it was that recruitment company or intermediary that eventually contracted with the Company. The Company never entered into a contract with the client.
The evidence establishes that the means by which the applicant obtained work was his marketing to, and relationship with, the recruitment or intermediary companies. The applicant made some effort to market direct to clients but that did not in any material way result in obtaining any of the work in the Eight Contracts.
LEGISLATIVE SCHEME
Part 2-42 (Personal services income) was introduced into the ITAA 1997 by the New Business Tax System (Alienation of Personal Services Income) Act 2000 (Cth). The provisions of Part 2-42 were amended (with effect from the beginning of the 2000-2001 income year) by the Taxation Laws Amendment Act (No 6) 2001 (Cth).
The Explanatory Memorandum to the New Business Tax System (Alienation of Personal Services Income) Bill 2000, stated:
Schedule 1 to this Bill amends the [Act] to introduce new rules for the income tax treatment of certain personal services income. Personal services income is generally paid to an individual who provides the services or to a company, partnership or trust (interposed entity) through which the services are provided by an individual.
The measure will not:
• apply where an individual or interposed entity is conducting a personal services business; and
• affect the legal status of an interposed entity or deem an individual to be an employee for the purposes of an Australian law or instrument.
The rules are designed to improve the integrity of the tax system by addressing both the capacity of individuals and interposed entities providing the personal services of an individual to claim higher deductions than employees providing the same or similar services and the alienation of personal services income through an interposed entity.
These improvements will be achieved by:
• limiting and clarifying the deductions available against personal services income at both the individual and interposed entity level; and
• ensuring that, after allowing deductions to the interposed entity, any income remaining is attributed to the individual. Schedule 1 to the Taxation Administration Act 1953 is being amended to provide a collection mechanism for tax payable on any income so attributed.[16]
[16] Explanatory Memorandum to the New Business Tax System (Alienation of Personal Services Income) Bill 2000 p 3.

The Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 2001 stated that:
Independent contractors (as opposed to contractors who work in essentially the same way as employees) are treated as personal services businesses and will therefore not be affected by the measure.[17]
[17] Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 2001 at 7.2.
Division 87 of Part 2-42 in the ITAA 1997 deals with personal services businesses. The object of the Division provided for in s 87-10 is to define personal services businesses in a way that ensures that it covers genuine businesses but not situations that are merely arrangements for dealing with the personal services income of individuals.
Section 87-15 provides relevantly:
1)An individual or personal services entity conducts a personal services business if:
…
(c) in any case — the individual or entity meets at least one of the 4 personal services business tests in the income year for which the question whether the individual or entity is conducting a personal services business is in issue.
2)The 4 personal services business tests are:
(a)the results test under section 87-18; and
(b)the unrelated clients test under section 87-20; and
(c)the employment test under section 87-25; and
(d)the business premises test under section 87-30.
The Australian Taxation Office has issued a taxation ruling as to what is a personal services business: Taxation Ruling 2001/8. I note that such a ruling may be “legally binding” on the Commissioner, but I am not bound by it: BHP Billiton Direct Reduced Iron Pty Ltd v Duffus, Deputy Commissioner of Taxation [2007] FCA 1528 at [104] where French J (as he then was) said:
The word ‘ruling’ has an obvious capacity to mislead. It is capable of conveying the impression that rulings published by the commissioner have legal force. In so far as it relates to the interpretation of the law, a ruling has no greater status than an administrative opinion.
The results test for a personal services business is set out in s 87-18 which provides relevantly:
87-18 The results test for a personal services business
3)A personal services entity meets the results test in an income year if, in relation to at least 75% of the personal services income of one or more individuals that is included in the personal services entity's ordinary income or statutory income during the income year:
(a)the income is for producing a result; and
(b)the personal services entity is required to supply the plant and equipment, or tools of trade, needed to perform the work from which the personal services entity produces the result; and
(c)the personal services entity is, or would be, liable for the cost of rectifying any defect in the work performed.
4)For the purposes of paragraph (1)(a), (b) or (c) or (3)(a), (b) or (c), regard is to be had to whether it is the custom or practice, when work of the kind in question is performed by an entity other than an employee:
(a)for the personal services income from the work to be for producing a result; and
(b)for the entity to be required to supply the plant and equipment, or tools of trade, needed to perform the work; and
(c)for the entity to be liable for the cost of rectifying any defect in the work performed;
as the case requires.
The unrelated clients test for a personal services business is set out in s 87-20 which provides relevantly:
87-20 The unrelated clients test for a personal services business
1)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
(d)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.
Note: Sections 87- 35 and 87-40 affect the operation of paragraph (1)(a) in relation to Australian government agencies and certain agents.
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.
CONSIDERATION OF THE RESULTS TEST
The applicant contends that he satisfies each of the requirements in s 87-18(3)(a), (b) and (c). When considering each of those requirements regard is to be had to custom or practice within the industry: s 87-18(4).
The applicant contends that for each contract there was a deliverable which was required to be produced. He says that progress payments were received so as to facilitate cash flow. He relies on the decision of Taneja and Commissioner of Taxation [2009] AATA 87 at [24]:
We also note that in the context of S 87–18 (3)(a) it is not how your fee is calculated, but what you are paid for, that is important. It is possible for a person who is contracted to produce a result to choose to charge hourly rates as the means of remuneration, without altering the fact that payment is made for producing a result. In saying this, we are mindful of the comment of Allsop J in IRG at [43] that the method of payment may be important – but there is nothing in what his Honour said to suggest that a fee based on time spent will necessarily exclude the possibility of being paid “for producing a result”.
Mr Boran-Fogarty gave evidence that business analysts are contracted for a specific period of time or 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 recruiters and the client. He said that an hourly basis for payment is just a convenient way of calculating the price for the result. The applicant gave evidence consistent with that of Mr Boran-Fogarty.
When considering the approach to be taken with respect to the results test I have taken into account the decision of IRG Technical Services v Federal Commissioner of Taxation (2007) 165 FCR 57 and in particular what was said by Alssop J at [21] to [53]. I note that it is too limited an approach to focus only on the terms of the written contracts and that the central relationship for examination is between the individual whose exertions produce the personal services income and the acquirer of those exertions or services. The terms of the written contracts are not irrelevant, but are not determinative.
The respondent does not dispute that the Company supplied at least some of the IT tools used by the applicant to carry out his work. Having made that concession, the dispute lies in whether the Company was contractually engaged to produce an identified result and whether it was liable for rectification of any defective work performed.
With respect to the producing a result concept, the Explanatory Memorandum for the New Business Tax System (Alienation of Personal Services Income) Bill 2000 provided:
[1.114] An individual will not satisfy the 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.
Each of the Eight Contracts entered into by the Company provided for an hourly rate of pay and remuneration on a weekly or fortnightly basis. Payment was made for the hours worked. There was no requirement in the contracts for the project, or a specified part of the project, to be completed before payment was made. The applicant confirmed in his evidence in chief that if the project is not completed then “I get paid for what I’ve done thus far.”[18] This is consistent with the express right of termination and the weekly or fortnightly basis for remuneration in the written contracts. The applicant gave a specific example of where his services had been terminated for poor performance and he said:
I completed what I could complete within the time I had remaining, and work that I had completed was carried forward. … I was paid up until the time I left…[19]
[18] Transcript 8 October 2018 p 67 line 36.
[19] Transcript 8 October 2018 p 68 line 1 and lines 10-11.
Mr Boran-Fogarty was asked about the situation where a contractor is terminated before completion of the project and he said that the contractor would be paid for their work up to the time that they leave.[20]
[20] Transcript 8 October 2018 p 26 line 6.
This evidence from the applicant and Mr Boran-Fogarty 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. In the example given, the result was not achieved because the project was only partially completed, but nevertheless payment was made for the hours worked.
Further, the evidence given by the applicant and Mr Boran-Fogarty does not establish an industry custom or practice of payment being conditional upon achieving a result.
The applicant has failed to establish that the personal services income from his work is “for producing a result” and accordingly fails to establish the first limb of the results test in s 87–18(3)(a).
The three requirements of the results test in ss 87–18 (3)(a) – (c) are cumulative and it is therefore not strictly necessary to consider the further limb in dispute namely whether the Company is liable for the cost of rectifying any defect in the work performed under s 87-18 (3)(c). Nevertheless, I find that this requirement has not been met. The applicant can point to no term in any of the contracts that imposes an obligation to rectify defective works on the Company. The applicant contends that it is customary and is so obvious to professionals working in the field of the applicant’s endeavour that defects must be rectified at no cost to the client, that the requirement need not be stated in contracts for service. I do not accept the applicant’s contention. The key consideration is whether there is exposure to commercial risk by liability to meet the cost of rectifying defective work. The evidence from the applicant and Mr Boran-Fogarty is that if defective work was carried out then the contractor would ultimately be terminated, but in that situation the contractor would be paid for the completed work. The reality in practice is that the Company would not be liable for the cost of rectifying any defect in the work performed.
CONSIDERATION OF THE UNRELATED CLIENTS TEST
I have set out above the terms of the unrelated clients test in s 87-20(1). In Cameron v Commissioner of Taxation [2012] FCAFC 76 at [54] it was said that the section involves:
(a)an identification of each income year;
(b)an identification of the income in question;
(c)whether that income was gained or produced from providing services to two or more unrelated entities and the identification of those unrelated entities;
(d)whether the individual or personal services entity made any offers or invitations to the public at large or to a section of the public to provide those services;
(e)if so, whether the services provided to the unrelated entities were so provided as a direct result of the individual or personal services entity making those offers or invitations.
I would add that, when considering the fourth element above as to whether offers or invitations were made to the public, it is necessary to also consider s 87-20(2).
It is not in dispute that during each year the Company produced income from providing services to two or more clients that are not associates of each other or of the Company. Those clients were the University of Adelaide, the Legal Services Commission, the Australian Submarine Corporation, ETSA Utilities, the Department of the Premier and Cabinet, Viterra, SA Health and Westpac. Consequently, there is no dispute with respect to the first limb of the unrelated clients test contained in s 87-20(1)(a).
The issue for determination is the second limb under s 87-20(1)(b) (the fourth and fifth elements referred to in Cameron v Commissioner of Taxation), namely whether or not the services are provided as a direct result of the applicant or the Company making offers or invitations to the public at large or to a section of the public. It was not argued that the Company was an agent in the sense referred to in s 87-40, which consequently has no application.
Did the Applicant make any offers or invitations to the public at large or to a section of the public to provide his services?
The applicant contends that he meets this element of the unrelated clients test for a personal services business because of his active profile on LinkedIn and his marketing by word of mouth at industry functions.
The phrase ‘making offers or invitations’ is not restricted to the contract law usage but is to be given a broad meaning to include any form of solicitation to the public or a section of the public: Taxation Ruling 2001/8 at [49].
The applicant ensured that his LinkedIn profile was kept up to date and it included a note that the Company would be available for a new assignment on a certain date, namely after completion of the current assignment. It was in this way that the applicant kept the public, or at least a section of the public, informed as to the services he was able to provide and when they could be provided. It was a form of advertising. The ordinary meaning of the word ‘advertise’ is ‘to make generally or publicly known, or to give public notice of’: Deputy Commissioner of Taxation v Rotary Offset Press Pty Ltd (1971) 45 ALJR 518. I am satisfied that the advertising on LinkedIn by the applicant constituted the making of an offer or invitation to the public, but I conclude for the reasons below that s 87-20(1)(b) is not made out because of the operation of s 87-20(2).
Section 87-20(2) – applicant not treated as having made offers
Section 87-20(2) provides:
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.
The reference to ‘a business of arranging for persons to provide services directly for clients of the entity’ is clarified by Taxation Ruling 2001/8 at [52] which says that it includes employment agencies, labour hire firms, personnel agencies or any similar arrangement involving an entity entering into a contract with a service acquirer to supply the services of an individual or personal services entity to that service acquirer. There is no dispute in this case that it includes Hays, Talent, IntecGroup, Icon and RM Walters who all operate as traditional recruitment or labour hire firms. There was some dispute by the applicant as to whether it would include KDN which was an IT company that often used subcontractors to provide part of the services needed for a particular job. Although not its core operation to act as a recruitment or labour hire company, I consider that KDN provided a ‘similar arrangement’ by contracting with the Legal Services Commission and arranging for the applicant to provide his services (through KDN) to the Legal Services Commission. Consequently, all Eight Contracts being considered in this case involved an entity that conducts a business of arranging for persons to provide services directly for clients of the entity. I refer to that entity as the intermediary.
The effect of s 87-20(2) is to narrow or qualify what might otherwise have been considered as advertising under subsection (1)(b). It operates to exclude from the operation of s 87-20(1)(b) any “offers or invitations to provide services merely by being available to provide the services through” an intermediary.
In this regard the Taxation Ruling 2001/8 says:
174. The operation of paragraph 87–20(1)(b) is subject to subsection 87–20(2) which provides that an offer or invitation is not made by an individual or personal services entity who is merely available to provide services through an entity that conducts a business of arranging for persons to provide services to its clients. As a consequence of this provision, individuals or personal services entities who obtain clients merely through registration with employment agencies, labour hire firms, personnel agencies or any arrangement involving an entity hiring the services of an individual or personal services entity in a manner similar to that of a labour hire firm, are taken not to have made an offer or invitation to provide services to the public at large or to a section of the public.
Further, the Explanatory Memorandum to the New Business Tax System (Alienation of Personal Services Income) Bill 2000 at [1.93] provides that an individual or personal services entity does not satisfy the condition about offering services to the public by registering with a labour hire firm or placement agency.
However, the example provided by the Taxation Ruling and the Explanatory Memorandum has less relevance in the digital age because, as explained by the applicant,[21] recruitment firms no longer rely on an internal database but instead carry out a search on LinkedIn so as to obtain a list of suitable candidates.
[21] Transcript 9 October 2018 p 103 line 3.
In this case the applicant made himself or his Company available to the intermediary by maintaining a LinkedIn profile. The LinkedIn profile contains information as to the applicant’s availability which is relied upon by the intermediary. It is this reliance by the intermediary that resulted in the applicant’s Company being chosen as a candidate and to carry out the work for the client. The applicant said that “They obviously know when there’s something available. They ring me.”[22] Consequently, s 87-20(2) operates because the applicant obtains his work by dealing with a recruitment company (an intermediary).
[22] Transcript 9 October 2018 p 91 line 35.
The applicant contends that the use of the adverb “merely” narrows the operation of the exclusion in s 87-20(2) to a situation where the Company does no more than offers its services through an intermediary. I accept that the word “merely” must be given some work to do. The Macquarie Dictionary defines merely to mean “only as specified, and nothing more.” The applicant further contends that because his LinkedIn advertising is directed at end user clients as well as intermediaries then he is doing more than offering services through an intermediary and therefore s 87-20(2) has no operation.
I do not accept the applicant’s contention. Section 87-20(2) operates expressly for the purposes of s 87-20(1)(b) and must be construed in its context.
Section 87-20(1)(b) directs attention to the means by which the Company obtained the business of the clients: Federal Commissioner of Taxation v Yalos Engineering [2009] FCA 1569 at [4]. If the applicant’s business is actually obtained through an intermediary (as opposed to coming directly from a client) then the exclusion applies because it is the conduct of the applicant advertising to the intermediaries that has caused the work to be obtained. This means that when considering whether there is a causal relationship under s 87-20(1)(b) the applicant will not be treated as having made an offer if the work obtained arose from an intermediary. The fact that the Company advertises beyond intermediaries is not relevant for the purposes of s 87-20(1)(b) because that subsection requires an analysis of how the services actually came to be provided; in this case through a contact from an intermediary “and nothing more”.

All of the work obtained and carried out by the applicant in the two relevant years was through an intermediary. 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.
Section 87-20(2) does have work to do in this case because the Company made itself available to provide services through an intermediary by maintaining a relationship with the intermediaries often facilitated by its profile on LinkedIn. The applicant considered the intermediary as “kind of like a business partner … where we’re all connected via LinkedIn.”[23]
[23] Transcript 9 October 2018 91 line 33.
Consequently, the Company is not treated as having made offers or invitations for the purposes of paragraph (1)(b). The exclusion provided for by s 87-20(2) applies such that the applicant is not treated as having made the requisite offer or invitation under s 87-20(1)(b). 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.
It would be open to the applicant to satisfy s 87-20(1)(b) if he could establish that the LinkedIn advertising had been relied upon by two or more unrelated clients resulting in work for them. That situation is provided as an example in Taxation Ruling 2001/8 which says:
175. This is to be contrasted with the situation where an individual or personal services entity makes offers or invitations to the public at large (e.g. by newspaper advertisement) as well as registering with a labour hire firm. The test would be met in this case if two or more unrelated clients engaged the individual or personal services entity as a result of the advertisement.
The applicant does not fall within the above example because none of the clients engaged the applicant or his Company as a result of the LinkedIn advertising. Rather, the clients were engaged by the intermediary in the circumstances provided for in s 87–20(2).
Were the services provided as a direct result of the Applicant’s offers or invitations?
Section 87–20(1)(b) must be read in conjunction with s 87–20(2) which applies in this case because the Company has provided its services through an intermediary in all Eight Contracts entered into. I have found that the fourth element referred to in Cameron v Commissioner of Taxation has not been made out so it is not necessary for me to consider the fifth element which requires that the services were provided as a direct result of the offers or invitations
However, if I am wrong about the operation of s 87-20(2) then I will consider this issue of ‘direct result’ which requires the applicant to establish a causal connection between the offers or invitations and the services provided.
Direct link between the advertising and the client?
The respondent contends that the applicant has failed to establish a direct link between the advertising and the services provided. The respondent accepts that there is advertising to the public or a section of the public through LinkedIn and through attendance at networking events, but it says that there is no evidence from the clients that it was the applicant’s advertising that resulted in the services being provided.
The applicant said that his advertising through LinkedIn and word of mouth was not just directed to the intermediary companies but was also directed to end user clients. The applicant asserted that clients relied on this advertising when choosing which contractor should be engaged. However, none of the clients were called to give evidence before the Tribunal. Instead, the applicant wrote to the clients and asked if they “could confirm that reviewing my LinkedIn profile or a word of mouth referral assisted me in obtaining the contracting engagement”. Six out of the eight clients said that there was a word of mouth referral. Four out of the eight clients said that they relied on the LinkedIn profile. The email exchanges with these clients were attached to a statutory declaration made by the applicant on 16 October 2018 which was a week after the oral evidence in the matter had been given. As set out at the beginning of these reasons, this evidence does not provide me with much assistance and is problematic for a variety of reasons. The question asked by the applicant was leading; the evidence is hearsay and there was no opportunity to cross examine the client. Even if I were to accept the truth of what was said in the written answers, I do not consider that they provide the required evidence to establish that the Company’s services were provided as a direct result of the Company making offers or invitations (for example, by advertising). The evidence before the Tribunal does not establish that clients relied upon any form of advertising by the applicant in relation to any of the services provided under the Eight Contracts. There is no direct link between the advertising and the client.
Direct link between the advertising and the intermediary?
In the alternative, the applicant contends that evidence from the clients is not required because the applicant need only establish that the services are provided as a direct result of the advertising. The applicant contends that the necessary causal relationship can be established by evidence of reliance by either the clients or the intermediary. He says that the services provided to the clients are a direct result of the advertising whether or not that advertising was relied upon by the clients or the intermediary. The applicant contends that it is sufficient to establish that an intermediary relied upon the advertising from the applicant and that as a result services were provided to the client.
Taxation Ruling 2001/8 at [49] provides some clarification as to the meaning of ‘direct result’ by saying:
However, a ‘direct result’ does not imply that there can be no step between the cause and the effect. The question to be asked is whether the offers made to the public can reasonably be said to have given rise to the work.
The applicant relies on this clarification to support its submission that there will still be a ‘direct result’ where an intermediary is involved.
The applicant has provided evidence that Domenic Novia of KDN and RM Walters contacted him via LinkedIn with respect to the work for Legal Services Commission and Westpac, respectively. The applicant also provided evidence that he was connected to Hays through LinkedIn. I infer, in the absence of evidence to the contrary, that KDN, RM Walters and Hays contacted the applicant as a result of his advertising on LinkedIn and that this resulted in the services being provided in five out of the Eight Contracts. The services in relation to the other three contracts were provided as a result of the applicant’s relationship with the respective recruitment companies and the evidence does not establish that those services were provided as a direct result of any offers or invitations from the applicant.
I pause to note that the applicant need only satisfy the unrelated clients test with respect to two non-associated entities in each year. So, for example, it would be sufficient for the applicant to satisfy the test by providing services to two out of the eight clients for whom work was done through the Eight Contracts.
The applicant’s alternative contention has merit because s 87-20(1)(b) does not say that the offer or invitation (for example, by advertising) from the applicant must be made to, or relied upon by, the client. The causal relationship is established even when the services provided to the client are a result of the intermediary being influenced by the advertising. Of course, the involvement of the intermediary in the circumstances of this case brings into play s 87-20(2) and therefore the applicant still fails to satisfy the unrelated clients test.
I accept this alternative contention but note that the applicant still fails to satisfy the unrelated clients test because of the operation of s 87-20(2) and its impact on s 87-20(1)(b).
CONSIDERATION OF THE PENALTIES ISSUE
The applicant is the sole director of the Company which was incorporated on 3 November 2004. The Company is owned wholly by Hamshere Pty Ltd, which is the trustee for the Fortunatow Family Trust. Up until 2014 the applicant was receiving tax services and advice from KJ Holland & Associates in Aldgate.
The Company received a total of $166,648.13 and $121,443.33 (GST exclusive) in the 2012 and 2013 years for providing the personal services of the applicant. The Company paid no remuneration to the applicant in the 2012 and 2013 years and he lodged a nil income tax return in those years. The Company claimed various deductions totalling $166,090 and $131,502 in 2012 and 2013 respectively. It reported nil taxable income for these years. Included in the deductions claimed by the Company where management fees of $121,340 in 2012 and $73,513 in 2013 paid to the Fortunatow Family Trust.
The applicant omitted the personal services income generated through Fortunatow Pty Ltd from his personal income tax returns for the years ended 30 June 2012 and 30 June 2013. Fortunatow Pty Ltd was audited for those years and found not to be a personal services business. As a result, the respondent amended the applicant’s income tax assessments to increase the amount of tax payable from nil to $83,576.90. A shortfall interest charge of $7,557.17 was also applied together with an administrative penalty of $41,788.45 on the basis of a finding of recklessness under s 284-90(1) of the Taxation Administration Act 1953. The subsequent objections to these amended assessments and penalties were disallowed by the decision under review dated 10 May 2017.
The applicant contends that irrespective of whether the Company is a personal services business, there should be no administrative penalty. The respondent contends that the decision under review should be affirmed and that the finding of recklessness was appropriate.
The table in subsection 284–90(1) of the Taxation Administration Act 1953 indicates that “recklessness” connotes conduct that is more culpable than a failure to take reasonable care to comply with a taxation law but less culpable than an intentional disregard of a taxation law. Cooper J in BRK (Bris) Pty Ltd v FCT [2001] FCA 164 said at [77]:
Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and a reasonable person in the position of the statement-maker would see that there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood the proscribed conduct is more than mere negligence and must amount to gross carelessness.
In 2008 the applicant obtained advice from Andrew Sinclair, a solicitor specialising in tax law at Cowell Clarke. The main focus of the advice was asset protection because the Fortunatow Family Trust held real property assets and it was considered preferable for that property to be held by an entity that was not carrying on any business trading activities. Some advice was given about the PSI regime in a written memorandum that discussed the potential application to any income earned from personal exertion. That memorandum said that “Transferring the real property assets … will not render the current structure any more vulnerable to … the PSI regime than what it is already.”
There was no advice in the written material as to whether the Company satisfied the relevant tests so as to be a personal services business. The extent of the advice given was confirmed by Cowell Clarke in a letter from Andrew Sinclair dated 8 October 2014 which said:
I confirm you first obtained our advice in September 2008 regarding how the PSI measures operate, and the possibility of your consulting services being caught within the operation of the PSI regime.
I confirm we advised you in September 2008 that a personal services business is exempt from the PSI regime providing the income is actually derived through the conduct of a personal services business.
I reject the applicant’s evidence given in cross examination that Mr Sinclair gave oral advice in 2008 that the applicant’s business structure would satisfy the relevant tests so as to be a personal services business.[24] If any such advice had been given then it would likely have been included in the written advice provided in 2008 and, further, Mr Sinclair would have referred to it in his letter dated 8 October 2014.
[24] Transcript 9 October 2018 p 142.
I find that what was written in the Cowell Clarke letter dated 8 October 2014 is an accurate statement as to the extent of the advice given to the applicant. As a result of this general advice the applicant became aware in 2008 about how the PSI regime operated (including the four tests[25]) and that it could potentially apply to him.
[25] Transcript 9 October 2018 p 140 line 37.
Despite this understanding, the income generated from the applicant’s personal exertion in the financial years 2012 and 2013 was recorded as income of the Company.
The advice from KJ Holland and Associates at the time was that management fees could be charged by the Fortunatow Family Trust and claimed as a deduction by the Company so that the Company would have no liability to pay tax. The end result of this scheme was that none of the applicant, the Company or the Fortunatow Family Trust paid any tax for the years in question. The applicant admitted in cross examination that the management fees were “inappropriate”[26] but said that it was his bookkeeper, Rodney Reynold, who suggested this structure.[27]
[26] Transcript 9 October 2018 p 144 line 13.
[27] Transcript 9 October 2018 p 143 lines 31 to 40.
It was concerns about structures such as this that brought about the reforms in the legislation introduced in 2000. The Explanatory Memorandum for the New Business Tax System (Alienation of Personal Services Income) Bill 2000 said as follows:
1.5 …The recommendations were aimed at improving the integrity and equity in the tax system. In particular, they addressed the increasing trends in:
-the alienation of personal services income; and
-the over claiming of income tax deductions by individual contractors and interposed entities providing personal services.
1.6 Alienation of personal services income occurs when the services of an individual are provided through an interposed entity rather than directly by the individual who performs the services. When alienation occurs, income may be retained in the entity and either taxed at the lower rate available to the entity and/or diverted to associates, allowing a lower rate of tax to be paid on that income. The use of interposed entities is also seen by some taxpayers as creating an entitlement to a range of deductions which would not be available to an individual providing the same services as an employee.
In circumstances where the applicant understood the potential application of the PSI regime to him it was reckless for him to set up a structure by which the income was allocated to the Company in such a way so as to result in no tax being paid. The degree of care expected from the applicant is high in this case because his conduct resulted in no tax being paid. A reasonable person with knowledge of the potential application of the PSI regime would not have merely relied upon the tax agent’s advice but would have sought specific advice with respect to the income being generated in the 2012 and 2013 financial years. It was reckless behaviour by both the applicant and the tax agent (who had seen the written advice from Mr Sinclair)[28] to not return to Mr Sinclair and seek specific advice about the income being generated in 2012 and 2013.[29] There was a very real risk that the Company would not pass the relevant tests that had been explained to the applicant such that the Company would not be considered a personal services business. The applicant was aware of this risk but nevertheless proceeded with a structure that resulted in a tax shortfall of $83,576.90.
[28] Transcript 9 October 2018 p 148 line 17.
[29] Transcript 9 October 2018 p 148 line 41.
Further, a reasonable person in the position of the applicant would have been aware that there was a real risk that he was not complying with the taxation laws. This is particularly so in circumstances where the applicant was not ignorant of the PSI regime and its potential application to him. The administrative penalty imposed by the respondent was appropriate in the circumstances.
DECISION
The decision of the Tribunal is to affirm the decision under review.

I certify that the preceding 100 (one hundred) paragraphs are a true copy of the reasons for the decision herein of Deputy President Britten-Jones.

101.

..........................[Sgnd]..............................................
Administrative Assistant Legal
Dated: 14 December 2018

Date(s) of hearing: 8, 9, 23, and 24 October 2018

Advocate for the Applicant: Mr J Findley

Solicitors for the Applicant: Lawyer Up Pty Ltd

Advocate for the Respondent: Ms K Clark

Solicitors for the Respondent: Commissioner of Taxation

Date(s) of hearing:	8, 9, 23, and 24 October 2018
Advocate for the Applicant:	Mr J Findley
Solicitors for the Applicant:	Lawyer Up Pty Ltd
Advocate for the Respondent:	Ms K Clark
Solicitors for the Respondent:	Commissioner of Taxation