Passing the other personal service business tests
A taxpayer will satisfy the ‘80/20 test’ contained in S.84-15(3) where less than 80% of the PSI derived by an individual or their PSE is from one source (being one client or any associates of the particular client) during the income year. As such, the 80/20 test requires consideration of the source of the PSI (i.e., the entity that has made, or is obliged to make, the payment to the individual or the PSE).
Where a taxpayer can satisfy the 80/20 test, they must then also satisfy one of the following other three PSB tests before they will be regarded as carrying on a PSB:
- a) The unrelated client's test – an individual or PSE will meet this test in an income year if:
- during the income year, the individual or PSE derives income from providing services to two or more entities that are not associates of each other, and are not associates of the individual or the PSE (‘the first limb’); and
- the services are provided as a direct result of the individual or PSE making offers, or invitations to the public at large or a section of the public (‘the second limb’).
Making offers to the public includes advertising in a newspaper, magazine, or business directory, maintaining an internet website, or word of mouth referrals. However, to satisfy this limb of the test, the individual or PSE must not only be able to demonstrate that offers or invitations to the public have been made, but also that work has been obtained as a direct result of those offers or invitations.
Importantly a taxpayer or PSE is not treated for the purposes of the second limb as having made offers, or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity. Refer to S.87-20(2).
- b) The employment test – an individual or PSE satisfies this test where one or more entities are engaged to perform work (not including any test individual), and those entities perform at least 20% (by ‘market value’) of the individual or PSE’s principal work for that income year. The test will also be met by an individual or PSE if they have one or more apprentices for at least half of the income year. Refer to S.87-25.
- c) The business premises test – this test is satisfied by an individual or PSE for an income year if at all times during the income year, the following conditions are satisfied in relation to business premises maintained, and used by the individual or PSE:
- The individual or PSE mainly conducts activities from which PSI is gained or produced from the business premises;
- The individual or PSE has exclusive use of the business premises;
- The business premises are physically separate from any premises used by the individual or PSE (or an associate) for private purposes; and
- The business premises are physically separate from the premises of the entity (or an associate of the entity) to which the individual or PSE provides services (i.e., the client’s premises). Refer to S.87-30.
A taxpayer who fails both the results test and the 80/20 test may apply for the Commissioner to determine if they are conducting a PSB. Refer to S.87-15(1)(a).