The employment 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 employment test.
To pass the employment test, your business must employ or contract others to help perform work that generates your PSI, and you must meet one of the following conditions:
- at least 20% of the principal work is performed by others
- one or more apprentices are employed for at least 6 months of the income year.
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 employment test for each individual. It is possible to have different outcomes for different individuals.
To meet this condition, your business must employ or contract others to perform at least 20% of the principal work that generates your PSI.
Principal work is:
- the work you must perform under a contract or agreement that you are paid for
- central to meeting your contractual obligations between you and your client.
It does not include work that supports you in meeting your contractual obligations, such as administrative tasks or bookkeeping.
To work out whether at least 20% of the principal work is being performed by your employee or contractor, you need to determine the market value of the principal work completed by your workers for the contract.
If that market value is 20% or more of the total contract price charged to your client, then this condition will be met.
When applying the employment test, you cannot count principal work completed by the following entities:
- a business (company, partnership or trust) associated with you or your business
- yourself as an employee of your business
- other individuals in your business who earn PSI through their own contracts with clients.
Example: principal work performed by others
Glenn is a house builder who provides building services as a sole trader. Glenn contracts with a major company to build houses. While Glenn does the physical building work, he pays his wife, Nan, to perform the tasks of contract administration, keeping track of costs, recording times worked, recording agreed or automatic variations, and making progress payment claims on clients. Such contract administration activities are not part of Glenn’s principal work, as they are not integral to and part of the principal work.
As Glenn does not engage Nan to perform any principal work, he does not meet that element of the employment test.End of example
To meet this condition, you must employ one or more apprentices for at least 6 months of the income year.
An apprentice is a person who works for a fixed period of time to learn a trade, business or skill. This includes government or industry group training programs. Research and other assistants are not considered to be apprentices.
An apprentice doesn't need to be apprenticed directly to your business. For example, apprentices supplied through a government program to work for a business as part of their trade training may meet this requirement.
An apprentice may work periodically throughout the income year, as long as their total time worked is at least 6 months.
Meg is an apprentice electrician who is sent by the Group Apprentice Scheme to work for Joe as part of her trade training. Meg works for 2 months, takes a 3-week break, and then works for a further 2 months, for a total of 4 months. Later in the same income year another apprentice electrician, John, is placed with Joe for 3 months.
In total, Joe has an apprentice working with him for 7 months in the income year.
Joe satisfies the employment test because for at least half of the income year he has one or more apprentices working with him.End of example
PSB tests are used to work out if the PSI rules apply to a particular income year.
If a contract goes across more than one income year, then for the purposes of applying the employment test you will only consider the amount of the contract price and market value of the employee's or contractor's work that was derived in the income year that you are applying the test to.If you are earning PSI, you can use the employment test to self-assess as a personal services business (PSB).