The unrelated clients test is one of the 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 unrelated clients test.
To pass the unrelated clients test in an income year, you must meet both of the following conditions:
- You must have received PSI from 2 or more unrelated clients.
- There must be a direct connection between the offer to the public and you being engaged to perform the work.
If you operate through a company, partnership, or trust and you have more than one individual generating PSI, you'll need to work out whether you pass the unrelated clients test for each individual separately. It is possible to have different outcomes for different individuals.
To satisfy this condition, you must have received PSI from 2 or more unrelated clients. Unrelated clients are clients who aren't associated with each other or with you.
Companies in the same group are related, as they are controlled by the same entity.
If you're a commission agent, you may be able to treat the clients of a principal as your own clients.
Example: unrelated clients
Kevin is an engineer who provides his services as a sole trader.
Kevin produces income from providing services to his brother’s company, Lost Exploration Pty Ltd. Lost Exploration Pty Ltd is an associate of Kevin. The contract with Lost Exploration Pty Ltd is a result of his relationship with his brother.
In addition, Kevin advertises his services on a website he has set up. Two companies, Pebbles Pty Ltd and GemCo Pty Ltd, contact Kevin after viewing his website. Kevin provides services to Pebbles Pty Ltd and GemCo Pty Ltd, neither of which is an associate of Kevin, or of each other, or of Lost Exploration Pty Ltd.
In the income year, none of these sources provides Kevin with more than 80% of his PSI, so he is able to self-assess whether he meets the unrelated clients test.
Although Lost Exploration Pty Ltd does not qualify as an unrelated client because it is an associate of Kevin’s, Kevin still meets the requirements of the unrelated clients test. This is because Pebbles Pty Ltd and GemCo Pty Ltd are 2 unrelated clients obtained as a direct result of Kevin making offers to the public at large or a section of the public (through his website).End of example
To meet this condition, there must be a direct connection between the offer to the public at large and you being engaged to perform the work.
The offer to the public must be the reason why you obtained the work from the client. Making offers to the public can include:
- print advertising
- radio and television broadcasting
- posting internet advertisements
- maintaining a website
- applying for competitive public tenders
- advertising in a newspaper, industry journal or business directory.
Importantly, all of these examples involve a public announcement of some kind.
'Word-of-mouth' referrals will not satisfy this condition of the unrelated clients test, unless the offer is made in very specialised or niche industries where there are only a very small number of potential clients.
Offers accepted by labour hire firms or similar intermediaries, or responding to advertisements on web-based recruitment sites, will not meet this condition.
To meet the unrelated clients test, new work from clients you have worked with previously still needs to be obtained as a result of your offers to the public in that year.
Example: making offers to the public
Deb is a graphic artist who works through her company, Debart Pty Ltd. Deb is the sole director and shareholder of the company. Debart Pty Ltd advertises its services on a website, and also in industry periodicals. Sometimes work is referred to Deb by word of mouth from industry contacts.
Any clients that Debart Pty Ltd sources from the website, or as a result of advertising in the industry periodicals, would meet the requirements of the unrelated clients test for making offers or invitations to the public at large or a section of the public. These forms of advertising are capable of reaching a wide audience.
As Debart Pty Ltd does not provide services in an industry that could be described as a niche industry, any clients obtained through the word-of-mouth referrals would not be counted for the purposes of the unrelated clients test.End of example