Introduction

Who is this schedule for?

If you complete items 14, 15 or 16 of your tax return (supplementary section), you must fill in the Business and professional items schedule for individuals 2014 and send it in with your tax return. These instructions will help you to fill in the schedule. If the business or professional items that apply to you are not filled in, your tax return may be sent back to you. We consider that your tax return has not been lodged until it is returned to us complete.

We may apply a penalty if your tax return and completed schedule are lodged late. For information on the penalty for failing to lodge on time, see Individual tax return instructions 2014 (NAT 71050).

If you have a net loss from a business activity carried on in partnership with others, you may need to complete items P3 and P9 of the schedule. See question 13 in Individual tax return instructions supplement 2014 (NAT 71051). Do not include your partnership details at any other item on your schedule.

From 2013 onwards, if you are required to complete the Business and professional items schedule you cannot lodge a paper tax return.

You will also need to complete the Individual PAYG payment summary schedule 2014 (NAT 3647) if you received any of the following:

• PAYG payment summary – business and personal services income (NAT 72545)
• PAYG payment summary – withholding where ABN not quoted (NAT 3283)
• PAYG withholding payment summary – foreign employment.

These instructions will also help you fill in the Individual PAYG payment summary schedule 2014.

How long did it take you to complete this schedule?

We are committed to reducing the costs involved in complying with your tax obligations. Your response to this item will help us monitor these costs as closely as possible.

Write the number of hours it took you to prepare and complete your Business and professional items schedule for individuals 2014 at S on page 4 of your schedule.

When completing this item, consider the time, rounded up to the nearest hour, you spent:

• reading the instructions
• collecting the necessary information to complete this schedule
• making any necessary calculations
• completing the schedule, and
• putting the tax affairs of your business in order so the information can be handed to your tax agent.

Your answer should reflect the time your business spent preparing and completing your schedule and the time spent by your tax agent and any other person whose assistance you obtained.

If you are a tax agent preparing this schedule on behalf of your client, include your time and a reliable estimate of their time.

Records you need to keep

You must keep records of most transactions in English for five years after you prepared or obtained them, or five years after you completed the transactions or acts to which they relate, whichever is the later. Taxation Ruling TR 96/7 Income tax: record keeping – section 262A – general principles clarifies the record-keeping obligations of small businesses, particularly for cash transactions. If you have losses, you should generally keep records for four years from the year of income when a tax loss is fully deducted or if you have applied a net capital loss, you should generally keep your records of the CGT event that resulted in the loss until the end of any period of review for the income year in which the capital loss is fully applied. Penalties can apply if you do not keep the records for the period required.

We are helping small business operators to meet their record-keeping obligations by reviewing their record-keeping practices. These reviews start with a phone call or a brief visit to the business premises. You can ask questions and an interview is arranged for a later date.

Some of the more significant record-keeping problems we have identified are failure to:

• record cash income and expenditure
• account for personal drawings
• record goods for your own use
• separate private expenses from business expenses
• keep valid tax invoices for creditable acquisitions when registered for the goods and services tax (GST)
• keep adequate stock records
• keep adequate records to substantiate motor vehicle claims.

For additional information, see Manage your invoices, payments and records.

Choice of superannuation fund

You must keep records that show you have met your choice of superannuation fund obligations. For more information about the records you need to keep, go to Super for employers or phone 13 28 64.

Hobby or business?

It is important to determine whether you are carrying on a business or pursuing a hobby, sport or recreational activity that does not produce income.

In general, you are considered to carry on a business if the activity:

• has started
• has a significant commercial purpose or character
• has a purpose of profit as well as a prospect of profit
• is carried out in a manner that is characteristic of the industry
• is repeated, regular or continuous
• cannot be more accurately described as a hobby, recreation or sporting activity.

For more information, see Working out if you are operating a business in Starting your own business. If you are a primary producer, see Taxation Ruling TR 97/11 – Income tax: am I carrying on a business of primary production?

Assets put to a tax-preferred use

Division 250 of the Income Tax Assessment Act 1997 applies to the leasing of assets and other similar arrangements to tax-preferred end users (such as tax-exempt entities and non-residents).

If Division 250 applies to an arrangement, then capital allowance deductions will be denied for the asset and the arrangement will be treated as a deemed loan that is taxed as a financial arrangement on a compounding accruals basis. Division 250 applies to all relevant arrangements where the tax-preferred use of an asset starts on or after 1 July 2007. However, Division 250 does not apply if the use occurs under a legally enforceable arrangement that was entered into before 1 July 2007.

Division 250 also does not apply if you are a small business entity for the income year in which the arrangement period for the tax-preferred use of the asset starts, and you choose to deduct amounts under Subdivision 328-D (capital allowances for small business entities) for the asset for that income year. Division 250 also does not apply to certain relatively short-term and lower-value arrangements.

When you have completed your Business and professional items schedule for individuals 2014, you will need to transfer:

• your Net personal services income (PSI) amount (if any) from A item P1 on your schedule to A item 14 on page 13 of your tax return (supplementary section)
• your Net income or loss from business amounts from Y and Z item P8 on your schedule to B and C (respectively) item 15 on page 14 of your tax return (supplementary section).

Concessions for small business entities

Did you carry on a business at any time during the year and have an aggregated turnover of less than $2 million?

No	Go to P1 Personal services income (PSI).
Yes	Read on to find out more about concessions for small business entities.

You need to know

Small businesses with an aggregated turnover of less than $2 million are called ‘small business entities’ and may qualify for a range of tax concessions.

Eligible businesses can choose to use the concessions that best suit their needs. It is not necessary to elect to be a small business entity each year in order to access the concessions, however businesses must review their eligibility each year.

A small business entity may be eligible for the following concessions:

• CGT 15-year asset exemption
• CGT 50% active asset reduction
• CGT retirement exemption
• CGT small business rollover
• Simplified depreciation rules
• Simplified trading stock rules
• Deducting certain prepaid business expenses immediately
• Accounting for GST on a cash basis
• Annual apportionment of GST input tax credits
• Paying GST by quarterly instalments
• Fringe benefits tax car-parking exemption
• Pay as you go (PAYG) instalments based on gross domestic product adjusted notional tax

Eligibility

You are a small business entity if you are carrying on a business and have an aggregated turnover of less than $2 million.

Aggregated turnover is your annual turnover plus the annual turnovers of any entities that are connected with you or that are your affiliates (adjusted to ignore dealings between connected entities and affiliates). Using aggregated turnover prevents larger businesses from structuring or restructuring their affairs to take advantage of the small business entity concessions.

You must review your eligibility each year.

For more information on the aggregation rules, see What are the aggregation rules? or phone 13 28 66.

Calculating your turnover

Turnover includes all ordinary income earned in the ordinary course of business for the income year. The following are some examples of amounts included and not included in ordinary income of a business:

Table: Calculating your turnover

Include these amounts sales of trading stock fees for services provided interest from business bank accounts amounts received to replace something that would have had the character of business income

Do not include these amounts GST charged on a transaction proceeds from the sale of business assets capital gains insurance proceeds for the loss or destruction of a business asset amounts received from repayments of farm management deposits

There are special rules for calculating your annual turnover if you have retail fuel sales or business dealings with associates.

The business operated for only part of the year

If you carried on a business for only part of the income year, your annual turnover is worked out using a reasonable estimate of what the turnover would have been if you had carried on the business for the whole of the income year. This includes winding up the business.

Satisfying the aggregated turnover threshold

Your business satisfies the $2 million aggregated turnover requirement if you meet one of the following:

• your aggregated turnover for 2012–13 was less than $2 million
• you estimate at the beginning of 2013–14 that your aggregated turnover for the year will be less than $2 million (and your aggregated turnover in 2011–12 or 2012–13 was less than $2 million), or
• your actual aggregated turnover, worked out at the end of 2013–14, was less than $2 million. You rely on this test only if you do not satisfy either of the other two tests above. If you satisfy this test only, you cannot use the GST and PAYG instalments concessions for 2013–14.

For more information about these small business entity concessions, see Small business entity concessions.

Former simplified tax system (STS) taxpayers

Continued use of the STS accounting method

Although the STS has now ceased, you may continue using the STS accounting method for 2013–14 if you:

• were an STS taxpayer continuously from the income year that started before 1 July 2005 and until the end of 2006–07
• used the STS accounting method from 2005–06 to 2012–13, and
• are a small business entity for 2013–14.

If you meet these three requirements, you can continue using the STS accounting method until you choose not to or you are no longer a small business entity.

If you continue to use the STS accounting method, you base the amounts you include at item P8 on the STS accounting method. If your accounting system or financial statements do not reflect the STS accounting method, you may need to make additional reconciliation adjustments at Reconciliation items at P8. If another provision of the income tax law apportions or alters the assessability or deductibility of a particular type of ordinary income or general deduction, the timing rule in the specific provision overrides the received or paid rule under the STS accounting method, for example, double wool clips or prepayment of a business expense for a period greater than 12 months. Because of these specific provisions, you may need to make adjustments at Reconciliation items.

The STS accounting method does not apply to income or deductions that receive specific treatment under income tax law, for example, net capital gains, dividends, depreciation expenses, bad debts and borrowing expenses.

Ceasing use of the STS accounting method

If you have discontinued using the STS accounting method, then business income and expenses that have not been accounted for (because they have not been received or paid) will be accounted for in this year. You may need to make additional reconciliation adjustments at Reconciliation items.

There is also a special rule that applies if you are winding up a business this year that you previously carried on and you were an STS taxpayer in the income year you ceased business. For more information, see Small business entity concessions.

Completing the schedule

P1 Personal services income (PSI)

Stop

You do not have to complete item P1 if your PSI is gained as an employee. Item P1 concerns sole traders only.

You also do not have to complete item P1 if your PSI was received through a company, partnership or trust.

Did you receive any PSI?

No	Print X in the No box at item P1 on your schedule. Go to P2 Description of main business or professional activity.
Yes	Print X in the Yes box at item P1 on your schedule. Read on.

You need to know

PSI is income that is mainly a reward for an individual’s personal efforts or skills.

Examples of PSI are:

• income of a professional practitioner in a sole practice
• income payable under a contract which is wholly or principally for the labour or services of a person
• income derived by a professional sportsperson or entertainer from the exercise of professional skills
• income derived by consultants from the exercise of personal expertise.

PSI does not include income that is mainly:

• for supplying or selling goods, for example, from retailing, wholesaling or manufacturing
• generated by a significant income-producing asset, such as a bulldozer
• for granting a right to use property, for example, the copyright to a computer program
• generated by a business structure, for example, a large accounting firm.

If you have earned PSI but not as an employee, you may not be able to claim certain deductions in relation to earning that income – for example, rent, mortgage interest, rates or land tax for your home, or payments to your spouse (or other associate) for support work, such as secretarial duties. This depends on whether:

• you have a personal services business determination from the Commissioner of Taxation stating that your PSI was from conducting a personal services business for the whole of the period you earned PSI, or
• you satisfied one of the four tests in Part A.

If you earned PSI as a sole trader, you need to read on and answer one or more of the questions in part A to determine whether deductions in relation to your PSI are affected by the PSI rules.

The PSI rules do not affect your legal, contractual or workplace arrangements; you won’t be treated as an employee as a result of the rules.

Part A

Did you satisfy the results test?

If you earn PSI, you satisfy the results test in the income year if, in respect of at least 75% of this income, you can answer yes to all of the following three questions in relation to your work:

• under your contract or arrangement, was the PSI paid to achieve a specified result or outcome?
• did you have to provide the tools or equipment necessary (if any) to do your work? (If no tools or equipment were required, answer yes.)
• were you liable for rectifying defects in your work?

You are paid to achieve a result under your contract when your contract requires the production of a specified result or outcome, and payment is conditional upon that outcome being achieved. The essence of the contract is to achieve a result and not just do work as required.

No	Print X in the No box at P item P1 on your schedule. Read on.
Yes	Print X in the Yes box at P item P1 on your schedule. Go to P2 Description of main business or professional activity.

Have you received a personal services business determination from the Commissioner that was in force for the whole of the period you earned PSI?

This is a notice from the Commissioner stating that you are conducting a personal services business. If you have a personal services business determination from the Commissioner, the PSI rules do not apply to your PSI and any deductions.

No	Print X in the No box at C item P1 on your schedule. Read on.
Yes	Print X in the Yes box at C item P1 on your schedule. Go to P2 Description of main business or professional activity.

Did you receive 80% or more of your PSI from one source?

If you don’t satisfy the results test and 80% or more of your PSI in the income year came from one client and its associates, you cannot self-assess whether you satisfy the other personal services business tests. The PSI rules apply to you unless you get a determination from the Commissioner.

If you don’t satisfy the results test, you can self-assess against the other tests only if less than 80% of your PSI came from each client.

You should consider PSI obtained by merely putting your name with a labour hire firm, placement agency or similar organisation as income from one client.

Commission agents

Special rules apply to commission agents. For more information, phone 13 28 66.

No	Print X in the No box at Q item P1 on your schedule. Read on.
Yes	Print X in the Yes box at Q item P1 on your schedule. Go to Part B.

Did you satisfy the unrelated clients test?

You will satisfy the unrelated clients test in the income year if you can answer yes to the following question:

• did you receive PSI from two or more clients who are not associated with each other or with you?

You must also provide the personal services work as a direct result of making offers to the public, for example, by advertising. Do not count clients obtained by merely registering with a labour hire firm, placement agency or similar organisation. Special rules apply to commission agents. For more information, phone 13 28 66.

No	Read on.
Yes	Print X in the box at D1 item P1 on your schedule. Read on.

Did you satisfy the employment test?

You satisfy the employment test in the income year if you can answer yes to either of the following questions:

• did you have one or more apprentices for at least half the income year?
• did you have employees or did you engage subcontractors or entities who performed at least 20% (by market value) of your principal work?

Principal work is the main work that generates the PSI and does not usually include support work, such as secretarial duties. You can count a spouse or family member who does principal work, but not companies, partnerships or trusts associated with you.

No	Read on.
Yes	Print X in the box at E1 item P1 on your schedule. Read on.

Did you satisfy the business premises test?

You satisfy the business premises test if you can answer yes to all of the following questions.

For the whole period during which you earned PSI, were your business premises:

• maintained by you?
• mainly used by you for work earning your PSI, for example, more than 50% of the use?
• used exclusively by you?
• physically separate from your private residence or the private residence of any of your associates?
• physically separate from the business address of your clients or their associates?

No	Read on.
Yes	Print X in the box at F1 item P1 on your schedule. Read on.

If you printed X at D1, E1 or F1, go to P2 Description of main business or professional activity. Otherwise read on.

Part B

Stop

Do not show in part B PSI amounts that were subject to foreign resident withholding. Show these at item P8.

You need to know

You must complete part B of item P1 if you received PSI and you did not:

• receive a personal services business determination in relation to your PSI
• satisfy the results test, or
• satisfy at least one of the other three personal services business tests (if less than 80% of your PSI came from each client).

PSI is divided into:

• income that was subject to a PAYG voluntary agreement to withhold tax
• income from which tax has been withheld because you did not quote your Australian business number (ABN) to one of your payers
• income received under a labour hire arrangement or from a specified payment
• other PSI.

Goods and services tax (GST)

If you are registered or required to be registered for GST, do not include any GST amounts in your assessable income. Your deductions should not include any amounts that relate to input tax credit entitlements.

Former STS taxpayers

If you are eligible and are continuing to use the simplified tax system (STS) accounting method, you must complete the income and deduction parts of item P1 using the STS accounting method. For more information, read Former simplified tax system (STS) taxpayers.

You may need to complete an Individual PAYG payment summary schedule

If tax has been withheld from business income, you should have received a payment summary.

You will need to complete the Individual PAYG payment summary schedule 2014 before completing the rest of item P1 if you received one of the following payment summaries:

• PAYG payment summary – business and personal services income
• PAYG payment summary – withholding where ABN not quoted.

While the PAYG payment summary - business and personal services income allows reporting of different payment types (including labour hire or other specified payments and voluntary agreement) you must specify on the schedule the nature of the income and the payment type made to you.

For further information, see the next section How to complete the Individual PAYG payment summary schedule 2014.

A payer may issue a receipt, remittance advice or similar document in place of the PAYG payment summary – withholding where ABN not quoted. This document must contain the same details as the payment summary and be signed by the payer.

If you received income from which tax was withheld and you did not receive or have lost your payment summary, contact your payer and ask for a copy.

How to complete the Individual PAYG payment summary schedule 2014

Step 1  Write your tax file number (TFN) and name in the appropriate boxes at the top of the schedule.

Step 2  Nature of income, print X in the Personal services income box.

Step 3  For each payment summary, transfer the following information to the schedule:

• the type of withholding (look at your payment summary to determine its type and complete the Type box, using the following key)
  V  voluntary agreement
  N  withholding where ABN not quoted
  S  labour hire or other specified payments
• the payer’s ABN or withholding payer number (WPN) and the payer’s name in the appropriate boxes
• the total tax withheld in the Tax withheld box
• the gross payment in the Gross payment box.

Step 4  Check that you have recorded details from all relevant payment summaries on your payment summary schedule then attach the schedule to page 3 of your tax return.

Do not attach the payment summaries to your tax return. You must keep them for a period of five years.

Payers must report to us details of payments where amounts of tax have been withheld. This information will be cross-checked with that on your tax return to make sure that you have declared the correct amount of income and the correct amount of tax withheld.

You may need two payment summary schedules.

If you have both PSI (item P1) and business income (item P8), you will need to complete an Individual PAYG payment summary schedule 2014 for each type of income.

Income

PSI – voluntary agreement

Did you receive any PSI that was subject to a PAYG voluntary agreement?

No	Go to PSI – where Australian business number not quoted below.
Yes	Read on.

The amount you show at M is the total income you received that was subject to a PAYG voluntary agreement, including amounts of tax withheld. You will be able to calculate this amount from your completed payment summary schedule.

Completing this item

Add up all the Gross payment amounts on your completed payment summary schedule that have a V in the corresponding Type box. Write the total at M item P1. Do not show cents.

If you complete M item P1 you must also complete G item 14 on page 13 of your tax return (supplementary section).

PSI – where Australian business number not quoted

Did you have any amounts of tax withheld from your PSI for failure to quote your ABN?

No	Go to PSI – labour hire or other specified payments.
Yes	Read on.

The amount you show at N is your total PSI from which an amount has been withheld because you did not quote your ABN, including the amounts of tax withheld. You will be able to calculate this amount from your completed payment summary schedule.

Completing this item

Add up all the Gross payment amounts on your completed payment summary schedule that have an N in the corresponding Type box. Write the total at N item P1. Do not show cents.

If you complete N item P1 you must also complete H item 14 on page 13 of your tax return (supplementary section).

PSI – labour hire or other specified payments

Did you receive any PSI under a labour hire arrangement or from a specified payment?

Specified payments include:

• income from tutorial services provided for the Indigenous Tutorial Assistance Scheme of the Department of the Prime Minister and Cabinet.
• income from translation and interpretation services for the Translating and Interpreting Service National of the Department of Home Affairs
• income as a performing artist in a promotional activity.

No	Go to PSI – other.
Yes	Read on.

Stop

Do not include income received as an employee of a labour hire business. These amounts will appear on your PAYG payment summary – individual non-business and you should show them at item 1 on page 2 of your tax return.

The amount you show at O is the total income you received from labour hire or other specified payments, including amounts of tax withheld. You will be able to calculate this amount from your completed payment summary schedule.

Completing this item

Add up all the Gross payment amounts on your completed payment summary schedule that have an S in the corresponding Type box. Write the total at O item P1. Do not show cents.

If you complete O item P1 you must also complete J item 14 on page 13 of your tax return (supplementary section).

PSI – other

Did you receive any other PSI?

No	Go to Deductions.
Yes	Read on.

Work out the total amount of other PSI and write this amount at J item P1.

If you are registered or required to be registered for GST, do not include any GST amounts in your assessable income.

Deductions

Limited deductions against PSI

The PSI rules affect the deductions you can claim against your PSI. They do not affect your legal, contractual or workplace arrangements; you won’t be treated as an employee as a result of the PSI rules.

The information on this page is a guide only. You may need further information to determine whether a deduction is available in your circumstances; Taxation Ruling TR 2003/10 – Income tax: deductions that relate to personal services income explains the PSI deduction limitation rules.

What deductions you may be able to claim

Subject to specific exceptions, the general rule is that you may claim an amount that is incurred in gaining or producing your PSI if you could claim that amount if the income was payable to you as an employee.

The following are examples of items you may be able to claim a deduction for:

• premiums for workers compensation, public liability and professional indemnity insurance
• bank and other account-keeping fees and charges
• tax-related expenses, such as the cost of preparing and lodging a tax return or business activity statement (BAS)
• registration or licensing fees
• expenses for advertising, tendering and quoting for work
• deduction for decline in value of depreciating assets
• simplified depreciation (if you are a small business entity)
• running expenses for your home office, such as heating and lighting for using a room in your house as a home office (not including rent, mortgage interest, rates or land taxes)
• salary and wages for an arm’s length employee (not an associate)
• contributions to a complying superannuation fund on behalf of an arm’s length employee (not an associate)
• reasonable amounts paid to an associate for principal work
• contributions to a complying superannuation fund or retirement savings account up to the superannuation guarantee amount for an associate doing solely principal work.

Do not include any amount that was a superannuation contribution for yourself. Any deduction for your own superannuation contributions must be claimed at item D12 on your tax return (supplementary section). See question D12 in Individual tax return instructions supplement 2014.

What you cannot claim

You cannot claim an amount for the following if it related to gaining your PSI:

• rent, mortgage interest, rates or land tax for your residence (or the residence of an associate)
• amounts paid to an associate for non-principal work, for example, support such as secretarial work
• contributions to a superannuation fund for an associate doing solely non-principal work.

Deductions for payments to associates for principal work

Do you have deductions for payments to associates for principal work?

No	Go to Total amount of other deductions against PSI below.
Yes	Read on.

Add up the total amount of payments made to associates for principal work. Write the total at K item P1.

Total amount of other deductions against PSI

Do you have other allowable deductions against your PSI?

No	Go to Net PSI.
Yes	Read on.

You need to know

In answering this question you include only non-commercial business losses deferred from a prior year if they relate to a business activity which is the same as, or similar to, one of your current year business activities. See P9 Business loss activity details for an explanation of how the non-commercial business loss rules work.

Your non-commercial business loss deduction may be reduced if:

• you earned net exempt income in this income year, or
• you became bankrupt or were released from any debts by the operation of an Act relating to bankruptcy.

For more information, phone 13 28 66.

Completing this item

Add up the total amount of all other expenses (including non-commercial business losses deferred from a prior year) that you can deduct from your PSI. Write the amount at L item P1.

Do not include amounts already recorded at K item P1.

If you are registered or required to be registered for GST, your deductions should not include the amount that relates to input tax credit entitlements.

Net PSI

Completing this item

To work out your net PSI go through the following steps:

Step 1  Add up the amounts shown at M, N, O and J item P1.

Step 2  Add up the amounts shown at K and L item P1.

Step 3  Take away the amount calculated at step 2 from the amount calculated at step 1. Write your answer at A item P1.

Step 4  Transfer the amount at A item P1 to A item 14 on page 13 of your tax return (supplementary section).

If the amount is a loss, you must:

• print L in the Loss box at the right of A item P1
• print L in the Loss box at the right of A item 14 on your tax return (supplementary section).

Other business income

Did you have any business income other than PSI?

Yes	Go to P2 Description of main business or professional activity.
No	Read on.

Finishing your schedule

If the only income you need to show on your schedule is personal services income, you need to complete only:

• item P2 Description of main business or professional activity
• item P3 Number of business activities
• item P9 Business loss activity details (if you had a loss), and
• item P10 Small business entity simplified depreciation (if you are a small business entity and have chosen to use the simplified depreciation rules).

Check that you have…

• transferred your net PSI amount from A item P1 to A item 14 on your tax return (supplementary section). If this amount is a loss, check that you printed L in the Loss box at the right of A
• completed and attached your Individual PAYG payment summary schedule 2014 to page 3 of your tax return (if you received PSI that was subject to withholding).