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Individuals must have a clear link between their social media and it driving customers to them to pass the unrelated clients test, says BDO.
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ATO revises personal services income guidance
12 January 2023
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The ATO has revised its guidance on personal services income (PSI) and personal services business (PSB) rules due to the Federal Court's decision in the FCT v Fortunatow case.
The updated guidance from the tax office was regarding the unrelated clients test which can be used to determine if an individual can be taxed as a PSB or if they must be taxed as a PSI.
The unrelated clients test’s first requirement was that an individual has done work for two or more unrelated entities of people while the second was that services must be provided as a direct result of making offers to the public at large or a section of the public.
BDO tax partner Mark Molesworth said the change to guidance meant those trying to use a social media account to tick the second box of the unrelated clients test, would need to be able to show clients came directly as a result of the account.
“The guidance accepts that a social media presence might tick that second box in terms of making offers to provide services to the public at large, because it’s not really significantly different to a website or advertising in the paper or having my name in the yellow pages, or any of those things that have always been accepted as advertising to the public at large,” said Mr Molesworth.
“What the guidance does make very clear now, based on the Fortunatow case, is that there must be a direct link between that advertising that you do and the winning of your work.”
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“So it’s not enough simply to say ‘I have the presence therefore I must be okay’, you’ve got to be able to say ‘I have the presence and it drove these customers to me’, or it caused these customers to come to me.”
Mr Molesworth said this was depicted in the FCT v Fortunatow case where Mr Fortunatow had a LinkedIn profile but it was found it was not the profile that brought work to him but instead a recruitment agency that found him work so the advertising to the public at large through LinkedIn was not causing the customers to come to him.
“What was causing the customers to come to him was his connection with various recruitment agencies, and so on that basis he failed the unrelated clients test because he couldn’t tick that second box,” he said.
“The advertising was not leading to the clients coming through his door and paying him money.”
“So what that meant was that all the income had to be assessed to Mr Fortunatow himself.”
Mr Molesworth also said those that meet the unrelated clients test and can be classed as a personal services business, and distribute income so it is not entirely personal, must also meet the anti-avoidance provisions.
“There’s another step, the general anti-avoidance provisions in the income tax law, part 4A,” he said.
“Even if I’m a personal services business part 4A can still apply and the tax office will apply and has historically applied it to say that if your income is predominantly from your personal exertion, then even if you are a personal services business, there are still circumstances where that income all has to be assessed to you.”
“So I would encourage people not to stop their analysis at ‘is this personal services income under the legislative definition?’ You then also need to go and consider part 4A.”
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