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  • Business premises test for PSI

    To pass the business premises test for personal services income (PSI) in an income year, your business premises must meet certain location and usage criteria.

    You pass the test if at all times in the income year, your business premises meets all of the following conditions:

    At all times in the income year means on every day during the income year in which PSI is generated. If you only traded for part of the income year, and maintained and used the premises to conduct activities for the entire time you traded, you may still be able to pass the test.

    You can change premises during the year as long as, at all times, there are premises meeting the requirements of the test.

    If you operate through a company, partnership, or trust and you have more than one individual generating PSI, you will need to work out whether you pass the business premises test for each individual. It is possible to be a PSB for one individual but not another.

    Example

    John does consultancy work as a sole trader. He started trading on 1 February, which means, in the income year, he only traded for five months. For these five months, John did the consultancy work from an office building he rented.

    John meets this condition of the business premises test as he maintained and used a business premises for the entire time that he was trading in the income year.

    End of example

    Used mainly for personal services work

    To meet this condition, you must use the business premises mainly (more than 50%) for work that generates your PSI. You may conduct activities that are private or unrelated to your personal services work at the premises provided they are 50% or less of all activities conducted at the business premises.

    Used exclusively by you

    To meet this condition, you must have exclusive use of the premises. This means you must own or lease the premises.

    If you jointly lease premises with another person or business, this would not be considered exclusive use.

    If you operate through a company, partnership, or trust that owns or leases premises and you have multiple individuals generating PSI at that premises, you would still be considered to have exclusive use.

    Example

    Jane is a lawyer who earns PSI through a partnership, Smith & Hagen. The partnership leases the bottom floor of a three-storey building. Clients can enter the office from the shared foyer.

    Smith & Hagen meets this condition of the business premises test as the office space the partnership leases is exclusively used for the partnership's business.

    End of example

    Physically separate from your private premises

    To meet this condition, the business premises must be separate from any premises which you or your associates use for private purposes. This means that business premises within private premises (for example, within your home) won't be considered physically separate.

    Physically separate from your private premises means:

    • the physical appearance of the business premises is distinct and separate from adjoining or surrounding private premises
    • access to the business premises for you and your clients is separate from access to your home

    Physically separate from your client's premises

    The premises must also be physically separate from the premises of your clients (or their associates).

    Generally, physically separate from your clients means:

    • the business premises are not physically or functionally incorporated into the premises of your client
    • access to your business premises is separate to the access to your client's premises
    • there is no internal access between your business premises and the client's business premises.

    For example if you lease a room at the premises of your client to conduct your business, your business premises are not physically separate from your client's premises.

    If you lease a discrete floor, or part of a floor, at the premises of your client, whether your premises are physically separate will depend on a range of factors, such as entry and exit facilities, signage, security arrangements and the extent to which the floors in the building are functionally and physically integrated.

    Remember, you only need to pass one of the tests in Step 4.

    Next steps:

    Last modified: 07 Aug 2019QC 46035