The business premises test is one of 4 PSB tests that taxpayers earning personal services income (PSI) can use to self-assess as a PSB.
If you self-assess as a PSB, the PSI rules will not apply to the PSI you earnt in that income year.
You must also meet the 80% rule to self-assess using the business premises test.
You will pass the business premises test if at all times in the income year you maintained and used a business premises which meets all of the following conditions:
- used mainly to gain or produce PSI
- used exclusively by you
- physically separate from your private premises
- physically separate from your clients' premises
If you operate through a company, partnership or trust, and the company, partnership or trust has more than one individual generating PSI, then the company, partnership or trust must work out whether they pass the business premises test for each individual separately. It is possible for one individual to conduct a PSB but not another.
At all times in the income year means on every day during the income year in which the 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.
Example: at all times in the income year
John does consultancy work as a sole trader. He started trading on 1 February, which means, in the income year, he only traded for 5 months. For these 5 months, John did the consultancy work from an office he rented.
John meets this condition of the business premises test, as he maintained and used a business premises for the entire time he was trading in the income year.End of example
To meet this condition, you must use the business premises mainly (more than 50%) for work activities that generate your PSI.
Where the business premises is used for more than one type of work or activity, you will need to consider which activities are PSI related, and which are not related to producing PSI. If more than 50% of the activities are not related to producing PSI, then you will not meet this condition.
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 your business premises has shared areas such as reception and waiting rooms, you do not have to consider the use of these shared spaces for working out if you have exclusive use of your business premises.
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: exclusive use
Norm is a draftsperson who conducts his drafting activities from an office he leases from Morn Pty Ltd. Norm’s office is adjacent to a suite of offices occupied by other professionals. Each occupant jointly leases a shared reception and waiting area from Morn Pty Ltd.
None of Norm’s drafting activities are done at the premises of his clients (or their associates) or from his (or his associates') private premises.
Norm has exclusive use of the relevant premises because he has a discrete lease over his office and all of the principal work of drafting is carried out in the office. Therefore, the business premises test is met.End of example
To meet this condition, the business premises must be physically separate from any premises you or your associates use for private purposes.
This means 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.
Example: not physically separate from your private premises
Melanie is an executive editor who provides consulting services to various publishing companies. She works from home in an office she has set up on the top floor of her garage. It contains everything she needs to run her business.
The garage is a separate structure to her home, and consists of vehicle storage and an entertainment room on the ground floor, with the office taking up the whole top floor. The office is used to undertake her editing work and occasionally she will meet clients there.
Melanie and her family often entertain, and frequent use is made of the entertainment room on the ground floor.
Melanie will not meet the ‘physically separate’ requirement of the business premises test, as her business premises are not physically separate from premises that she and her family use for private purposes.End of example
Example: physically separate from your private premises
Robert is an architect who contracts through his company, Robbo Enterprises Pty Ltd. Robert owns 2 adjoining duplexes. He lives in one duplex and rents the adjoining duplex to his company to use as its business premises.
The duplexes are on separate titles and have a dividing wall which prevents internal access between premises. Each duplex has its own front and back entrance and a fence separating the 2 properties. The duplex used by Robbo Enterprises Pty Ltd for its business premises displays the business’s signage.
The only activities undertaken at the business premises generate Robert’s PSI. The business premises are physically separate from Robert’s private premises and those of his clients. The business premises test is met.End of example
The premises must also be physically separate from your clients' (or their associates') premises.
Generally, physically separate from your clients means:
- the business premises are not physically or functionally incorporated into the premises of your client (or clients)
- access to your business premises is separate to the access to your clients' premises
- there is no internal access between your business premises and your clients' 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:
- the extent to which the floors in the building are functionally and physically integrated
- entry and exit facilities
- security arrangements
- occupancy rights.