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AJML Accountants Update – August 2017

Personal Services Income (PSI) – 4

Taxpayer is conducting a Personal Services Business (‘PSB’)

(b) Less than 80% of PSI is derived from one source (‘the 80% rule’)

A source of income includes all income of the entity and any associates. Therefore, where an entity derives income from multiple clients during the year, they need to be sure that none of those clients are associated for the purposes of determining whether the 80% rule is satisfied.

If the taxpayer derives less than 80% of its PSI from one source and passes one of the following tests, it will be a PSB and not subject to the PSI rules (although, if ‘income splitting’ is involved, consideration should be given to the potential application of Part IVA):

The unrelated clients test

where the individual doing the personal services work derives PSI from two or more clients who are not associated with each other or with the individual, as a direct result of making offers to the public.

The business premises test

where business premises owned (or leased and used exclusively) by the taxpayer are mainly used for the personal services work performed by the taxpayer and are physically separate from the private residence of that taxpayer (or their associates), or from the

business address of their clients (or their associates).

The employment test

where the taxpayer has employees or engages sub-contractors or entities(other than associated companies, partnerships or trusts) that perform at least 20% (by market value) of the principal work; or has apprentices for at least half the year.

(c) Personal Services Business Determination (‘PSBD’)

If a taxpayer does not satisfy the requirements of (a) or (b) the taxpayer is not taken to be carrying on a PSB unless they obtain a PSBD from the Commissioner. Refer to Subdivision 87-B. In practical terms, in order to obtain a PSBD, the taxpayer must demonstrate to the Commissioner that they would ordinarily be able

to satisfy the results test, the business premises test or the employment test but for unusual circumstances. In respect of the unrelated clients test, the Commissioner will only grant a PSBD if the taxpayer can show that they pass, or normally pass, the unrelated clients test AND that they normally pass the 80% test as well.

TAX TIP – Applying for a PSBD

A taxpayer might also apply for a PSBD, of their own accord, because they are not sure whether they pass any of the four PSB tests or where unusual circumstances prevent them from meeting one of the four tests.

What deductions can be claimed under the PSI rules?

The PSI rules affect the deductions a taxpayer can claim against their PSI. Subject to certain exceptions, a taxpayer can generally deduct an amount incurred in gaining or producing PSI if the Taxpayer could have deducted that amount had the income been paid to them as an employee. The table below provides examples of deductible and non-deductible expenses.