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 ATO confirming that you are a personal services business.
Even if your income is not affected by the changes, the general anti-avoidance provisions of Part IVA may still apply to schemes to reduce income tax 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'.
The changes to the tax law clarify what deductions can be claimed against affected personal services income and limits some deductions. In addition, a personal services entity may have an additional PAYG withholding obligation in relation to affected income that has not been paid out within a certain time as salary or wages to the individual service provider.
There is a flowchart in the fact sheet Alienation of personal services income - overview which you can use to work out whether you are affected by the personal services income law.
The business premises test is one of four personal services business tests (results test, unrelated clients test, business premises test, employment test) for determining whether a personal services business is being conducted in an income year. 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. The personal services entity will meet the business premises test in relation to your personal services income if it meets the requirements set out below in relation to that income.
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?
Where you commence business activities during the income year, you will still pass the business premises test if you maintain and use business premises for all of that portion of the income year during which you conduct your activities.
Mary quits her employment during the year and decides to set up Mary's Design Consulting Services. She rents a small shop at the local shopping centre and sets it up. She opens for business on 1 February and conducts her business from the premises for the rest of the income year. She passes the business premises test since she maintains and uses business premises for all of the time she operates her business.
You must have exclusive use of the premises. However, the premises may be shared with parties who work for you.
The business premises must be separate from any premises used for private purposes by the individual who provides the personal services or any of the individual's associates. This means that business premises within private premises generally will not be considered to be physically separate. The term 'associate' includes an entity in which you have an interest or control, or a relative.
The premises must also be physically separate from premises of your clients (or their associates).
Some of the factors which would be taken into account in deciding whether the premises meet the requirement of 'physically separate' are:
- whether the business premises are detached from other building structures on the land
- whether the business premises have separate external access for you and your clients, and
- whether there is a permanent barrier preventing internal access between the business premises and the remaining premises.
Yes. You must use the premises mainly for the work that generates your personal services income. It is not sufficient to merely own or lease the premises and conduct activities that are unrelated to your personal services work at the premises.
The premises do not need to be the same set of premises throughout the year. This means that you can change premises during the year as long as, at all times during the income year, you have premises satisfying the requirements of the business premises test.
You can self-assess against the business premises test if less than 80 per cent of your personal services income comes from each client (counting associated clients as one client). This means you can work out whether you meet the business premises test or one of the other personal services business tests without contacting the ATO. You can also use the ATO's Personal services business self-assessment guide and checklist, which is intended to help you self-assess whether you are conducting a personal services business. Do not send the Self-assessment guide and checklist to the ATO, simply complete it and keep it with your other business records. If you self-assess that you meet all the requirements of the business premises test for the income year, the changes to the law will not apply to your personal services income for that income year.
If 80 per cent or more of your personal services income for an income year comes from one client (including associates of the client), the only test you can self-assess against is the results test. You cannot self-assess in relation to the other three personal services business tests, including the business premises test. The changes to the law will affect you unless you get a determination from the ATO. More information on this is available in the fact sheet Alienation of personal services income - obtaining a personal services business determination.
This is a notice from the ATO stating that you are conducting a personal services business and that the changes to the tax law do not apply to your income.
You can apply for a determination if:
- you are not sure whether you meet one or more of the personal services business tests, or
- you don't meet the results test and 80 per cent or more of your personal services income comes from one client, or
- unusual circumstances prevent you from meeting one or more of the tests.
You must use the approved form and include any documents requested on the form. To obtain a copy of the Guide and application for a personal services business determination see the ATO contact details at the end of this fact sheet.
Unusual circumstances are circumstances that are completely out of the ordinary and that prevent you from meeting a test. The circumstances must only be temporary, with the normal circumstances due to resume in the short term. If you expect them to continue indefinitely, this suggests they are no longer unusual.
Robert is a draftsman who undertakes his work from an office he leases in the city. He has operated from this office for many years and has numerous clients. A large client offers Robert a two year contract to draw up plans for a major shopping centre overseas. As a condition of the contract Robert must work from the client's overseas office for the full two years.
Robert accepts the contract. He does not meet the results test. Robert considers that he is conducting a personal services business and that the changes to the tax law do not apply to him. As more than 80% of his personal services income comes from one client Robert must seek a determination from the ATO. He applies on the grounds that unusual circumstances prevented him from meeting the business premises test.
If you are not sure whether you meet any of the tests, you can apply to the ATO for a personal services business determination.
You can also seek a private binding ruling from the ATO 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 the general anti-avoidance provisions of Part IVA apply to you. To obtain a Request for private ruling form, see the ATO contact details at the back of this fact sheet.
Alienation of personal services income - what is personal services income?
Alienation of personal services income - the results test
Alienation of personal services income - the unrelated clients test
Alienation of personal services income - the employment test
Alienation of personal services income - the business premises test
Alienation of personal services income - obtaining a personal services business determination
Alienation of personal services income - deductions
Alienation of personal services income - additional Pay As You Go (PAYG) withholding obligations
- If you need more information about the issues in this fact sheet, you can:
- speak to your tax adviser
- phone the ATO's Business Tax Reform Information Line on 1300 137 619
- use the ATO's Personal services business self-assessment guide and checklist or apply to the ATO for a determination. You can download a copy of the relevant documents from the ATO website or call 1300 720 092
- write to us at BTR Advice, Locked Bag 9000, Albury NSW 2640
- email us at BTRAdvice@ato.gov.au
- phone the Telephone Typewriter Service if you have a hearing or speech impairment on 1300 130 478
- refer to Taxation Rulings TR 2001/7 Income tax: the meaning of personal services income and TR 2001/8 Income tax: what is a personal services business
- Taxpayers who do not speak English and need help from the ATO can phone the Translating and Interpreting Service (TIS) on 13 14 50.
Please get help from the Taxation Office or a professional tax practitioner if you feel this fact sheet does not fully cover your circumstances. We regularly revise our publications to take account of changes to the law and you should make sure that this edition is the latest.
As part of our commitment to producing accurate publications, a taxpayer will not be subject to penalties if it is demonstrated that a tax claim is based on wrong information contained in this fact sheet. However, interest could be payable depending on the circumstances of the case.
The information in this publication is current at 12 November 2001.
Last Modified: Thursday, 12 August 2004