Decision impact statement
Commissioner of Taxation v Yalos Engineering Pty Ltd; Yalos Engineering Pty Ltd and Commissioner of Taxation
 FCA 1569
2009 ATC 20-154
(2009) 75 ATR 744
77 ATR 542
Administrative Appeals Tribunal
 AATA 408
2010 ATC 10-139
(2010) 79 ATR 282
Venue: Federal Court of Australia
Venue Reference No: VID 479 of 2009 (FC); 2007/3018-3019 (AAT)
Judge Name: Jessup J (FC); Pascoe SM (AAT);
Judgment date: 23 December 2009; 3 June 2010
Appeals on foot: No.
Decision Outcomes: 1) Favourable (remitted back to the AAT): 2) Adverse
Impacted AdviceRelevant Rulings/Determinations:
Personal services income
Personal services business determination
Unrelated Clients Test
Meaning of offers or invitations to the public or a section of the public
Outlines the ATO's response to these decisions which concern whether the taxpayer was entitled to a Personal Services Business Determination (PSBD) under s 87-65 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the personal services income of an employee.
Brief summary of facts
The taxpayer was a personal services entity within the meaning of s 86-15(2) of the ITAA 97, whose sole assessable income during the 2004 and 2005 income years was from a labour hire firm, Manpower Services P/L. The taxpayer agreed with Manpower in October 2002 to provide the services of an employee, Mr Koundouras, as an offshore installation engineer to BHP Billiton in relation to the Minerva gas field until 31 December 2003. The contract was extended to April 2005 as a result of delays in the construction of the onshore gas plant. Manpower paid the taxpayer a daily rate for the services of Mr Koundouras.
BHP Billiton approached Mr Koundouras on the recommendation of a colleague. The other contracts that the taxpayer obtained in the 2001 and 2003 to 2008 income years in providing the services of Mr Koundouras as a consulting engineer in the offshore oil and gas industry were obtained by word of mouth or recommendations from others in the industry. The potential clients for those services were restricted to a small number of companies.
In the 2001, 2003 and 2006 to 2008 income years, the taxpayer's assessable income included consulting fees from the provision of Mr Kondouras' services to two clients.
The taxpayer applied to the Commissioner for a PSBD for the 2004 and 2005 years in relation to the personal services income of Mr Koundouras.
The taxpayer sought a PSBD on the basis that it met the results test in the 2004 and 2005 years and/or also would have met, or could reasonably be expected to meet, the unrelated clients test in those years but for unusual circumstances. The Commissioner refused to issue a PSBD to the taxpayer. The application to the AAT related to the refusal to issue a PSBD.
The AAT (SM Pascoe) initially directed the Commissioner to make a PSBD for the taxpayer in relation to the personal services income of Mr Koundouras for the 2004 and 2005 years.
The AAT found that the taxpayer did not meet, nor could reasonably be expected to meet, under s 87-65(3A) the results test under s 87-18 in either of the relevant years because none of the fees paid were for producing a result. While the installation contractor for the pipeline produced a result, Mr Koundouras was hired at a daily rate to provide expertise not otherwise available within BHP Billiton. In addition, Mr Koundouras did not provide equipment or tools required to produce the pipeline, nor would he be liable for the cost of rectifying any defect in the pipeline (paragraph 14).
However, the AAT concluded that, but for unusual circumstances, the taxpayer could have been expected under ss 87-65(3B) and (6) to meet the unrelated clients test in s 87-20 for the 2004 and 2005 years. The services originally contracted for were unusually large, and there were unexpected delays that extended the contract for more than one year.
The AAT also concluded that the taxpayer met the test in the 2001 and 2003 years, could reasonably have been expected to meet the test in subsequent years, and that the services were provided as a direct result of offers or invitations to the limited market for those services (paragraph 15).
Issues decided by the court and Tribunal
The Court (Jessup J) decided that the AAT had erred in law in failing to consider under s 87-65(3B) and (6) whether, but for unusual circumstances applying to the taxpayer in the 2004 and 2005 years, it had met paragraph (b) of the unrelated clients test in s 87-20(1) (paragraphs 15-21). Accordingly, his Honour allowed the appeal and remitted the matter back to the AAT for hearing and determination consistently with the reasons of the Court. For the sake of completeness, his Honour also made comments about other questions of law raised by the Commissioner:
- to the extent that the AAT concluded that a 'section of the public' in paragraph 87-20(1)(b) was apt to include all the 'players' in an industry that had a limited number of 'players', the AAT did not err (paragraph 24);
- though not clear, the AAT would have erred if it had found that the relevant 'offers or invitations' referred to in paragraph 87-20(1)(b) could be made by anyone other than the taxpayer (paragraph 25); and
- 'subsequent income years' in s 87-65(4) does not mean every subsequent income year but such years generally, and not necessarily without exception (paragraph 27).
On remittal from the Federal Court, the AAT (SM Pascoe) affirmed its first decision and directed the Commissioner to make a PSBD for the taxpayer in relation to the personal services income of Mr Koundouras for the 2004 and 2005 years.
In particular, the AAT decided that, but for the unusual circumstances of the extension of the contract with BHP Billiton, the taxpayer would have provided services to 2 or more entities and those services would have been provided as a direct result of the taxpayer, through Mr Koundouras as a director/employee, making offers or invitations to the section of the public engaged in offshore petroleum exploration and mining. The regular personal contact that Mr Koundouras had with the relevant companies amounted to making offers or invitations to provide services (paragraphs 19-21).
ATO view of Decision
The AAT's initial decision is consistent with the ATO view in Taxation Ruling TR 2001/8 in relation to the application of the results test in s 87-65(3A).
The Federal Court recognised that, in relation to the application of the unrelated clients test in paragraphs 87-65(3B)(a) or 87-65(6)(a), neither provision is satisfied unless, but for unusual circumstances applying to an entity in the relevant year, both paragraphs of s 87-20(1) could reasonably have been expected to be met or would have been met.
The ATO accepts the views of the Federal Court that 'subsequent income years' in subsection 87-65(4) does not mean every subsequent income year, but such years generally, and that 'a section of the public' in paragraph 87-20(1)(b) can refer to the 'limited number of players' that might operate within the narrow area of activity for which the offered individual's skills and experience are suited.
These views are not inconsistent with TR 2001/8. Whether they are satisfied in a particular case depends on the facts and circumstances of each case. The ATO accepts that it was open to the AAT on the facts of this case to find in its decision on remittal from the Court that the small number of companies engaged in offshore petroleum exploration and mining constituted a relevant 'section of the public' for which the skills and experience of Mr Koundouras were suited.
The ATO also notes that the Court made it clear that the relevant 'offers or invitations' referred to in paragraph 87-20(1)(b) could only be made by the taxpayer.
Though the AAT's decision on remittal from the Court was short on detailed reasoning, the ATO accepts that there are no clear legal errors in the conclusion that, but for unusual circumstances, the taxpayer could reasonably have been expected to meet the test in paragraph 87-20(1)(b).
Implications on current Public Rulings & Determinations
The ATO considers that the decisions in this case are consistent with the principles in Taxation Ruling TR 2001/8.
Implications on Law Administration Practice Statements