The recent decision in Cameron v. Commissioner of Taxation  AATA 386 illustrates the importance of taxpayers satisfying all relevant tests when claiming they operate a personal services business for income tax purposes.
Mr Cameron supplied drafting services to a number of clients via a company of which:
- he and his wife were the sole directors and shareholders; and
- he was the sole employee who provided drafting services (although the company also earned some income from shipping activities).
Even though the company had a substantial number of clients, the AAT held that it did not qualify as a personal services business because it did not advertise its services widely enough.
The “unrelated clients test” requires that:
- an entity must earn income from providing services to two or more entities that are not associates; and
- the services must be provided as a direct result of the entity making offers or invitations to the public or a section of the public (section 87-20 Income Tax Assessment Act 1997).
The company’s business was generated by word of mouth referrals, with Mr Cameron relying on a small number of his personal contacts within the industry to generate work.
The company had not advertised its drafting services in any publication (such as the Yellow Pages). In addition, although the company had its own website for a period of time, none of the income earned arose as a result of website inquiries.
The AAT did not accept Mr Cameron’s word of mouth referrals could be considered “offers or invitations to the public at large or to any section of the public” and the unrelated clients test was not satisfied.
This decision can be distinguished from that in FCT v Yalos Engineering Pty Ltd where the tribunal held that a company operating in a niche market where there was a very small pool of potential clients did not have to advertise in public media such as the Yellow Pages.
In light of this decision, clients who are claiming they carry on a personal services business should seriously consider advertising the business as extensively as possible (subject to cost).
For example, most businesses should at least have a listing in the Yellow Pages and a website. Depending on the nature of the business it might also be prudent to advertise in selected publications – for example free suburban newspapers.