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PSI in TR 2022/3 – Steps 5 and 6: In this episode we cover the 80% hurdle and the Unrelated Clients Test
PSI in TR 2022/3 – Steps 5 and 6
In the last episode, ep 418, we covered Steps 1 to 4 to deal with PSI. In this episode, we will cover steps 5 and 6, the 80% hurdle, and the second PSB test, the unrelated clients test. Then in the next episode, ep 420, we will cover the employees, business premises test, PSB determination and special agent rule.
As before, we will include sections and examples from TR 2022/3, but have significantly shortened the examples. And also renamed all the protagonists to just one, called Bob. So there is Bob, his wife Sheila, their two college kids and then Bob also has a company and a trust.
Here is what we learned from talking with Neil Brydges of Sladen Legal in Melbourne, the speaker in this episode. Here is what we learned but please listen in as Neil explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
PSI in TR 2022/3 – Step 5 and 6
The Unrelated Clients test is often your best chance of qualifying as a PSB if you work as a professional providing personal services.
Step 5 – 80% Hurdle
Here is what Para 66 of TR 2022/3 says about the 80%:
“Less than 80% of their PSI is from the same entity and its associates (the 80% rule)….”
The 80% hurdle doesn’t apply to all four PSB Tests but only to the Unrelated Clients, Employees and Business Premises Test but not the 75% Results Test.
80% Hurdle versus Unrelated Clients Test
At first sight, the 80% hurdle looks identical to the Unrelated Clients test. Both require at least 2 clients. But they are very different.
The 80% requires two clients, with no client paying you 80% or more of your income. It doesn’t matter how you got these two clients.
In the Unrelated Clients Test you also need to have at least two clients but you don’t have to worry about the 80% hurdle. Instead it is all about how you got these two clients,. You need to have made an offer to the public and then have a causal link between this offer and acceptance. Word of mouth doesn’t count.
Step 6 – Unrelated Clients Test
Here is what Para. 97 of TR 2022/3 says,
“To meet the unrelated clients test in an income year:
a …PSE is required to gain or produce the PSI from providing services to 2 or more entities…
the services must be provided as a direct result of making offers or invitations to the public at large or a section of the public.”
The two clients must have been acquired as a direct result of your offer to the public or a section of it. The Fortunatow case was all about this direct result. The two entities can’t be associated of each other or with the test individual.
The Fortunatow Case
The Fortunatow case is a big case for PSI. Mr Fortunatow was a business analyst who worked for various companies via an agency. When the clients engaged the agency, they didn’t know Mr Fortunatow, hence no direct result. Just being available to an agency is not enough. Applying to agencies is not enough, as the Fortnatow case confirms.
Offer to the Public
Para. 104 says,
“A word-of-mouth referral is not generally considered to satisfy the requirements of the unrelated client’s test. A word-of-mouth referral is when a …PSE is offered work because of a recommendation from a previous client or industry contact. However, offers made by word of mouth in a very specialised or niche industry where there are only a very small number of potential service acquirers may, in limited circumstances, meet this condition.”
Website, social media, blog posts, videos, podcasts, posters, flyers, printed ads etc can all be ways to make offers to the public. Your LinkedIn profile can be an offer to the public, confirmed by the Fortunatow ruling. If you operate in a niche market, it is ok if the offer is only to a section of the public.
Example 23 of TR 2022/3:
Bob advertises his services through Company A on a website and also through advertising in industry periodicals. Sometimes work is referred to him by word of mouth from Bob’s industry contacts. The word of mouth clients don’t count in the unrelated clients test.
Niche Market
In a niche market for highly specialised skills where you only have a very small number of potential clients, the unrelated client’s test is met when an offer is made through word-of-mouth referrals.
Example 26 of TR 2022/3:
Bob has 2 unrelated clients. He heard about the availability of work from a mate and contacted the companies to offer his services. Bob works in a niche industry and the work he does is highly specialised. Because of this, there are only a very small number of potential clients for him to access. Hence his word of mouth counts as an offer and acceptance.
Direct Result
If you have a direct result for some clients but not for others, you meet the direct result requirement as long as you have it for at least two clients.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 27 May 2024
Tax Talks spoke to Neil Brydges - Principal Lawyer at Sladen Legal - for more details.
