To qualify for income splitting, your income is subject to special income splitting tests.
This is a summary of a highly technical section of the tax act. It’s essential that you contact one of our senior tax specialists before making any decisions based on your interpretation of this information.
If the results test is not satisfied, it’s necessary to consider whether 80% or more of an individual’s personal services income is from one source.
If less than 80% of the personal services income is from a single source and the individual or personal services entity can satisfy one of the three other tests (see below), the personal services income is not attributed to the individual whose personal services gave rise to that income. By passing one of the three tests, the individual or entity is considered to be carrying on a personal services business.
The income can then be run through a business entity that includes other parties.
If 80% or more of the personal services income is from a single source, the income will be subject to the personal services income regime unless the Tax Office makes a personal services business determination.
In that case 100% of the income will be taxed to the individual who did the bulk of work for the income.
When testing whether 80% or more of personal services income comes from one client, Australian government agencies (i.e. Commonwealth, State and Territory agencies) are not treated as associates of each other.
The three other tests, any one of which can be used to establish a personal services business are:
- The unrelated clients test
- The employment test
- The business premises test.
For the purpose of the 80% rule:
- Income derived as an employee or officeholder, or income of a religious practitioner subject to withholding, is not taken into account
- An entity and all of its associates are treated as one entity
- Special rules apply to commission-based agents that make it easier for them to show that their income is from more than one source .
The source of the personal services income is determined by reference to the contract under which the services are made. The source is not necessarily the entity that physically pays the income. For example, a doctor receives income from a number of patients even though the doctor may actually be paid by a single medical fund.
An individual or personal services entity (service provider) meets the unrelated clients test in an income year if both the following conditions are met:
- The service provider gains income from providing services to two or more entities that are not associates of each other and are not associates of the service provider.
- The services are provided as a direct result of the service provider making offers or invitations (e.g. by advertising) to the public at large or to a section of the public. Offers or invitations may also be made by public tenders or word of mouth referrals. They are less likely to be made to a “section of the public” if they are made to a limited number of entities or to related entities.
An individual or personal services entity will not be accepted as having made offers or invitations to provide services to the public if all it does is put forward a name to an organisation (e.g. an employment agency or labour hire firm) that is in the business of arranging for persons to provide services directly to its clients.
Example: At the instigation of her employer (Appliances), an engineer has her employment contract terminated and replaced by a contract for the provision of engineering services. The engineer provides services to Appliances and to Products, an associate of Appliances. She also, as a result of placing advertisements in industry journals, provides services to another company (Metals) that is not related to any other relevant parties.
The engineer will not satisfy the unrelated clients test as she only has one unrelated client (Metals). Appliances do not qualify because the services are provided to it as a result of its own actions, rather than the engineer making an offer or invitation to the public. Products do not qualify because it is an associate of Appliances.
If the engineer had a second eligible unrelated client, she would have satisfied the unrelated clients test. In that event, and assuming that 80% or more of her income was not from one source, she would not be subject to the personal services income regime. (Based on Taxation Ruling TR 2001/8.)
Special rules apply to commission-based agents that make it easier to comply with the unrelated clients test.
An individual service provider meets the employment test in an income year if at least 20% (by market value) of the individual’s principal work (i.e. not administrative work) for the year is performed by an entity or entities engaged by the individual. The entities cannot be non-individuals that are associates of the individual. For the meaning of “principal work”, see Taxation Ruling TR 2001/8.
An individual can therefore, pass the test by employing:
- An individual, whether an associate (e.g. relative or de facto spouse) or not, where that person undertakes 20% or more of the individual’s principal work, or
- A business entity that is not an associate, where it undertakes 20% or more of the individual’s principal work.
An individual will not pass the employment tests if it:
- Engages an associated business entity (e.g. family company or trust), regardless of what aspect of the individual’s personal services activities (e.g. administration or principal work) it is involved in, or
- Engages any individual (e.g. family members) or business entity to perform purely administrative tasks.
Both an individual and a personal services entity can also meet the employment test by having one or more apprentices (this does not include research assistants or other employees who fulfil a similar role) for at least half the income year. The half-year engagement does not need to be continuous, nor does the same apprentice need to be engaged for the full period (s 87-25).
An individual or a personal services entity (service provider) meets the business premises test in an income year if, at all times during the year, the service provider maintains and uses business premises:
- At which it mainly conducts activities where personal services income is gained
- Of which it has exclusive use (this would typically require ownership or a lease)
- That are physically separate from any premises that the service provider or its associate uses for private purposes, and
- That are physically separate from the premises of the service provider’s client or client’s associate (s 87-30).
It is not necessary to use the same premises for the entire year. In Dixon Consulting 2007 ATC 2550, business premises (comprising a two-story office and garage area) situated on the same land as residential premises occupied by a director of the taxpayer company and his family failed to satisfy the business premises test. The AAT considered that the director did not have exclusive use of the garage area as the private use was not so slight that it should be ignored. The car of a travelling salesperson does not qualify as business premises (Taxation Ruling TR 2001/8).
The leasing of the office does not satisfy the business premises test because:
- The office lease is shared with someone else; he therefore does not have exclusive use of the premises, and
- Craig does not use the premises mainly to gain or produce his personal services income — he uses the office at his brother’s home for this.
The use of the office at his brother’s home is also insufficient for Craig to pass the business premises test.
If Craig were to exclusively lease premises in the shopping centre and use them mainly for gaining or producing his personal services income, he would pass the business premises test.
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