Personal services income (PSI) is included in an individual’s assessable income if it is mainly derived from an individual’s personal exertion, whether the income is received directly by the individual or by an interposed entity. However, this does not apply to income derived by a personal services business (PSB).

There are several tests to determine whether a PSB exists, one of which is the ‘business premises’ test.

In a recent decision, the Federal Court found that the Administrative Appeals Tribunal (AAT) made an error of law in finding that the business premises test had been satisfied on the basis of exclusive use of premises which were physically separate from premises used for private purposes in a case where areas of the property such as the driveway and gate were shared between the business and home.

The taxpayer company conducted a business from a separate two storey building on the same land that the private dwelling of the controller of the taxpayer was also situated. The controller was employed by the taxpayer entity and provided business-consulting services to the taxpayer’s clients.

The taxpayer had successfully argued to the AAT that the business premises were separate from the controller’s residence and hence the taxpayer was operating a PSB and not merely deriving PSI.

The Federal Court found that the AAT failed to reach a clear position concerning whether the business had ‘exclusive use’ of a shared garage, and that the required physical separation of the premises had been met.

Accordingly, the AAT’s earlier decision was overturned, and the Commissioner’s original assessment was upheld.

Part IVA Applied to Tax Effective Investment Scheme

PSI Test—Separate Business Premises

In two recent decisions, the AAT disallowed deductions claimed by two taxpayers in relation to a tax effective investment involving a eucalyptus oil project.

During the 1998 and 1999 tax years, the taxpayers claimed various deductions for costs associated with their participation in the project. The Commissioner sought to amend the taxpayers’ returns for those years to disallow certain deductions claimed, applying Part IVA to the scheme.

The taxpayers appealed the assessment to the AAT on the basis that the scheme was not entered into with a sole or dominant purpose of obtaining a tax benefit.

The Commissioner argued that the specific benefit derived from entering into the scheme

Maxim Group

February 2007

Volume 2, Issue 1

Maxim Insight

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