“Taxation Law Case Study” – Our Sample Paper

The PSI rules apply to Robert for a number of reasons. According to the Australian taxation laws, the derivation of personal service income is from the contracts completion of the individual. Each contract involves an apportionment of a certain percentage of the money available. The manner of determining this percentage of income is not from the salary and wages of a regular job but a personal input. This applies to all types of sole businesses with regard to the manner of obtaining the income.

The first consideration is whether the income earnings were through the individual’s expertise, skills or knowledge. This means that the factor in consideration is the labor component. The calculation of this is half the gross earnings of Robert. In 2012, there were earnings of $90,000; 50 percent of which is $45,000. Therefore, job contracts involving expertise, skills and knowledge contributing to more than 50 percent of the total income consist of personal service income. This means that Robert’s technical contribution into the business appeals for PSI rules application.

The second consideration to the rules of personal service income is the actual input of tools, materials and equipment. There are several job contracts that involve the sole proprietor using their own paraphernalia to complete the task. The total costs of Robert’s business were just $3,824. Therefore, an input of tools into a job that involves the income being more than 50 percent constitutes to the rules of personal service income. Therefore, with his personal input being lower than the 50 percent mark, he qualifies to be liable to the PSI rules.

In order to determine whether the personal service income rules apply to Robert, there is the calculation of a series of tests. They are the results test, unrelated client test, employment test and business premises test. When the business of a sole proprietor passes these tests, then they are not liable to the personal income service rules. This means that they can claim specific deductions against the PSI as well as meeting specific tax obligations. However, when the business passes the tests, then they are liable to the personal income service tests.
The first step is the results test where there is the calculation of uncertain circumstances through the filing of a determination. This is done through the Australian Authorities in the government that calculate the taxes payable by sole proprietors. A yes answer passes the test; whether payment for the work done is after the completion, whether the sole proprietor has to apply the necessary tools and equipment and whether the sole proprietor is liable for any defects. These questions pertain to at least 75 percent of the personal service income (Johnsson, 2004). Robert gets a straight no to both these questions because of a total expense of less than 50 percent. This makes him liable to follow the PSI rules.

The next step is the 80 percent rule where this percentage of the income comes from a single client. If so, it is necessary for the sole proprietor to apply for a determination. Otherwise, the personal service income rules will apply to the business entity. Therefore, since the financial year of 2012 shows that there was the receiving of $12,750 out of $15,000 from a single client indicates 85 percent of the income. There are other tests carried out. The first is the unrelated client test that asks the following questions: does the business get PSI from unrelated clients and is the result of provision of services through advertisements?. There is a pass on this test if the answer to both questions is yes.

The other test is the employment test that seeks results from a single income year. A yes answer to both questions passes the test and makes the business not liable to the personal income service rules. The questions revolve around the participation of other contractors in the business and the presence of apprentices for at least half the year. The last test is the business premises test that has a number of questions. The questions are whether the sole proprietor owns the business premises exclusively, the use of the business premises and the physical separation from the actual residence. A yes answer to these questions passes the tests.

Therefore, the above calculations indicate the actual consequences of the application of the PSI rules. There are personal implications such as the manner in which Robert uses his residence as a business premise. This has an expense of $1,680. There are also consequences for Electric Cars Pty Limited because some of the rules indicate the application of the rules to the business. This means that Robert will have more tax obligations to the authorities as a result and will have to apply to his business. The ordinary 37 percent interest rate on salary will have to increase significantly from the current $400. Otherwise, all the Australian laws apply to this situation to meet to specific tax obligations.

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