Generally, per the Income Tax Assessment Act 1997 (Cth) (the Act), a taxpayer can only claim deductions for personal service income if they are conducting a personal service business. Put simply, if you are an independent contractor, you can only claim tax deductions if it is clear that you are conducting a personal service business.
To show that you are conducting a personal service business, one of the tests you must meet is the unrelated clients test under the Act.
A recent decision made by the Federal Court in the matter of Commissioner of Taxation v Fortunatow [2020] FCA 1247 has affirmed the way in which this test is interpreted.
Summary of the Decision
Pursuant to the Act, the unrelated client test requires two things to be proven:
- That the individual or entity has gained or produced income from providing services to two or more unrelated entities; and
- That the services are provided as a direct result of the individual or entity making offers or invitations to the public to provide these services.
The purpose of this test is to ensure that a genuine business situation exists to offer services to the public at large. This is different from an employee-like situation and is what essentially entitles independent contractors to certain tax-break benefits.
The Federal Court has held that an offer or invitation does not exist simply because the person is available to provide their services through some association or connection with another entity. For example, if you are a general practitioner working within a surgery, you working within that surgery alone is not enough to show that you have made an offer or invitation for your services.
Since this decision, the Australian Taxation Office has made a Taxation Ruling in relation to this test. The Australian Taxation Office has ruled that a wide variety of activities can constitute an ‘offer’ or ‘invitation’, these range from print advertising to owning and operating a website.
However, it must be clear that there is a direct connection between the offers and invitations being made, and the clients which are attracted to your business as a result.
Key Takeaways for Personal Businesses and Contractors
In order to possibly be awarded certain tax-break benefits under the Act, if you are self-employed or work as an independent contractor it is important that you meet the requirements of the unrelated clients test.
If you do not advertise your services to the public at large, whether that be through a website or print advertising, you may not meet the threshold for this test.
It is important that you demonstrate that you have ‘offered’ or ‘invited’ your services to the public at large or a section of the public. Failure to do so could mean that you miss out on certain deductions at tax time.
If you operate a business or are an independent contractor who has a question regarding industrial relations issues, please contact Aaran Johnson or Simon Kumar to discuss how Marsdens can assist your business.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.
