The Personal Services Income restrictions for small service providers, contractors and consultants have been around for more than 20 years. Recent ATO guidance expands on how you have to acquire an “unrelated client” so you qualify as a business. Just having a social media presence won’t avoid PSI issues.
The ATO distinguishes between income generated by personal efforts or skills, or by a business providing those types of services. If you don’t pass the tests for a Personal Services Business, then it is likely you’ll be liable to be taxed like a personal wage earner at the standard marginal rate – even if you work through an entity like a Pty Ltd company.
Just as a reminder, in general you only have to meet one of the following tests to qualify as a Personal Services Business. But if 80% of your income is from one source, you must pass the Results test (The 80% Rule):
- results test
- unrelated clients test
- employment test, and
- business premises test [More information on these tests].
The recent changes apply to the Unrelated Clients test.
The Unrelated Clients Test
To pass the unrelated clients test, your income has to come from 2 or more entities that aren’t associates, AND you have to provide those services as a direct result of making an offer to the public at large (such as through advertising or similar). In general, Labour hire companies do not qualify as unrelated clients.
Many businesses have attempted to use social media to qualify for making an offer to the public at large.
The recent tax ruling makes it clear:
- social media does not qualify as making an offer to the public at large unless you can show the business income was specifically generated by that social media
- word-of-mouth referral does not generally satisfy the requirements of the unrelated clients test.
Having social media alone does not meet the second part of the unrelated clients test. You have to be able to show that you gained the work or client directly from the social media, so you wouldn’t have the income without it. A recent case held that having a LinkedIn profile didn’t meet the requirement.
While most services businesses are very familiar with PSI issues, if you need clarification, or are just starting out, please contact us for guidance.
