How do the Personal Services Income Rules work?

If 80% or more of the PSI comes from one source, the results test must be passed.  Otherwise, the business is not a PSB and the PSI rules will apply.

If less than 80% of the PSI comes from one source, the business will be a PSB (and the PSI rules will not apply to that income) if the business can pass any one of the four tests.

To satisfy the results test,

  • at least 75% of the income must be for producing a result:
  • the entity or individual must supply the plant and equipment needed to perform the work to produce that result; and
  • the entity or individual must be liable for the cost of rectifying any defect in the work

To satisfy the unrelated clients test, the business must obtain its income from two or more entities that are not associated with each other or the business and the business must be effectively offering its services to the public.  The Commissioner has said that it is sufficient if those services are available to the public and are made known simply by word of mouth.  However, this is not what the legislation says.  For the test to be passed, the individual or entity must be making offers or invitations to the public at large, or a segment.  This appears to require positive or active conduct by the individual or entity, not just passive reliance on the recommendations of others.

To satisfy the employment test, the business must employ some person other than the person to whom PSI would be attributable if the rules applied and that person must do at least 20% of the principal work of the business during the year or the business must have an apprentice for at least six months of the year.

To satisfy the business premises test, the premises occupied by the business must be:

  • mainly used to conduct activities from which the PSI is gained;
  • used exclusively by the individual or entity (in other words, not shared with anyone else);
  • physically separate from any premises that the individual or entity (or an associate) uses for private purposes;
  • apt for the purpose; and
  • physically separate from any premises of an entity for whom the work is done or from an associate of that entity.