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07 Jun 11 Personal services business tests failed - Cameron

A taxpayer who supplied drafting services to a number of clients has failed to satisfy both the business premises test and the unrelated clients test for purposes of the personal services business regime under Part 2-42 ITAA 1997. The Commissioner’s objection decision was affirmed, apart from a reduction in penalty in respect of a claim for travel expenses in one of the years under review.

The taxpayer supplied drafting services through a company of which he and his wife were the only shareholders and directors. The company’s income from drafting services was produced through the personal services of the taxpayer. The company also derived income from ship provedoring activities.

The taxpayer claimed that he was entitled to the benefit of the business premises test and the unrelated clients test provided by Division 87 ITAA 1997.

The evidence showed that the taxpayer obtained drafting work by relying on a small number of personal contacts and relationships in the industry. None of the relevant contacts arose from advertisements in any publication or on any website or through any other similar means, although the taxpayer’s potential pool of clients was large. He had worked according to his evidence for mining, infrastructure, manufacturing and construction companies amongst other industries. On this basis the Tribunal did not accept that the taxpayer’s drafting contracts were obtained through offers or invitations to the public at large or to any section of the public within the meaning of s 87-20(1)(b) ITAA 1997. The Tribunal distinguished the decision of the Federal Court in FCT v Yalos Engineering Pty Ltd; Yalos Engineering Pty Ltd v FCT [2009] FCA 1569; 2009 ATC 20-154; 77 ATR 542, on the basis that the extensive range of large industries for which the taxpayer in the present case had performed work was to be contrasted with the highly specific niche industry in Yalos, which related to the offshore undersea gas pipeline industry. Neither the Tribunal nor the Federal Court in Yalos sought to determine any general proposition whereby a word-of-mouth referral will invariably satisfy the offer or the invitation to the public test in the relevant section.

The taxpayer failed the business premises test because on the evidence it was clear that the taxpayer’s premises had been used in respect of drafting to an insignificant extent only.

Re Cameron and FCT [2011] AATA 386 (Administrative Appeals Tribunal, J Block DP, 6 June 2011).