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From 1 July 2000, changes to the tax law may affect the personal services income of contractors and consultants. Income is personal services income if it is mainly a reward for an individual’s personal efforts or skills. This applies regardless of whether the income is received directly by the individual or is received by a company, trust or partnership (personal services entity).
If the changes to the tax law apply to you, your personal services income will be treated as your income and you must include it in your individual tax return. The changes to the tax law do not affect your legal, contractual or workplace arrangements with clients.
The changes do not apply to personal services income earned by employees, except where the individual is an employee of a personal services entity. The changes also do not apply to personal services income that is earned in the course of conducting a personal services business.
You qualify as a personal services business if:
- you meet the results test, or
- less than 80 per cent of your personal services income in an income year comes from each client and you meet one of the other three personal services business tests (the unrelated clients test, employment test or business premises test), or
- you obtain a determination from the Tax Office confirming that you are a personal services business.
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Note: income splitting etc
Even if your income is not affected by the changes, the general anti-avoidance provisions of Part IVA of the Alienation of personal services income legislation may still apply to schemes where the dominant purpose is to reduce income tax liability, such as by income splitting.
More information on this is available in the fact sheet General anti-avoidance rules and how they may apply to a personal services business
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To work out if your income is affected by the changes to the tax law follow the steps outlined in the flow chart below. If the personal services income is paid to a company, partnership or trust, the words you and your refer to that entity.
The four tests for determining whether a personal services business is being conducted in an income year are the:
If you meet one or more of the tests, your personal services income is taken to be generated in the course of conducting a personal services business and the changes to the tax law will not affect your income.
If the personal services income is paid to a company, partnership or trust, rather than to you directly, the entity is your personal services entity.
All taxpayers can self-assess against the results test. Those who receive less than 80 per cent of their personal services income from each source can also self-assess against the three other tests (unrelated clients, employment and business premises). You can work out whether you meet one or more of the other three personal services business tests without contacting the Tax Office.
You can also use our Personal services business self-assessment guide and checklist.
If you pass one or more of the four personal services business tests the changes to the tax law do not apply to you and will not affect your tax obligations.
The changes to the tax law will apply to you and this may affect your tax obligations, unless you receive a personal services business determination from the Tax Office.
If you earn personal services income, you will meet the results test in an income year if, for at least 75 per cent of this income:
- you are paid to achieve a specified result or outcome under your contract or arrangement
- you have to provide the tools or equipment necessary (if any) to do your work? (if no tools or equipment are required, answer yes), and
- you are liable for rectifying defects in your work.
If you don’t meet the results test, you can self-assess against the other tests for an income year if less than 80 per cent of your personal services income in that year comes from each client.
If you don’t meet the results test and 80 per cent or more of your personal services income comes from one client in an income year, you cannot self-assess. The changes to the tax law will affect you unless you get a determination from the Tax Office.
Go to the results test for more details.
You will meet the employment test in an income year if:
- you have employees or engage sub-contractors or entities who perform at least 20 per cent (by market value) of the principal work, or
- you have apprentices for at least half the year.
If the personal services income is paid to a company, partnership or trust, the word you refers to that entity.
Go to the employment test for more details.
You will meet the business premises test in an income year, if you can answer yes to all of the following questions (if the personal services income is paid to a company, partnership or trust, the words you and your refer to that entity).
At all times in the income year, are your business premises:
- owned or leased by you?
- mainly used for personal services work (eg, more than 50 per cent of the time) by the individual doing the work?
- used exclusively by you?
- physically separate from the private residence of the individual doing the personal services work, or their associates?
- physically separate from the business address of your clients, or their associates?
Go to the business premises test for more details.
You will meet the unrelated clients test in an income year if you can answer yes to the following question (if the personal services income is paid to a company, partnership or trust, the words you and your refer to that entity).
- Does the individual doing the personal services work have personal services income from two or more clients who are not associated with each other or with you (or the individual, if you are a personal services entity)?
Unrelated clients are clients who are not associates of each other. This means they are not related or controlled by the same individuals or entities. To work out if you pass this test, only count clients that are not related.
If you are not sure whether you meet any of the tests, you can apply to the Tax Office for a personal services business determination. See the Guide and application for a personal services business determination.
You can also seek a private binding ruling from the Tax Office on any issue of law, including:
- whether you receive personal services income
- whether you meet any of the tests for conducting a personal services business
- or whether general anti-avoidance provisions of Part IVA apply to you.
Application forms for a request for private ruling are available from all branches of the Tax Office and the use of them, although not compulsory, will usually speed up the handling of an application. The forms detail the type of information required by the Commissioner when dealing with requests for rulings. See How to apply for a private ruling.
Last Modified: Wednesday, 27 May 2009
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