The personal services income measures (the PSI rules) aim to provide similar tax treatment for personal services income (PSI), whether derived by an employee or a contractor. They also aim to prevent certain taxpayers from ‘alienating’ their PSI to another entity. However, they do not apply where the taxpayer qualifies as a personal services business (PSB). Why is this important and what do the PSI rules mean? We will answer these questions within this article.
The exclusion of PSBs is heavily relied upon by many taxpayers to avoid the application of the PSI rules. Unfortunately, the PSI rules are notoriously difficult to apply, and many taxpayers incorrectly self-assess that they are carrying on a PSB. This has resulted in several disputes, many of which demonstrate the difficulties in interpreting how the PSB tests are to be applied.
In light of three recent decisions, namely Fortunatow v FCT [2019] FCA 1247 (‘Fortunatow’s case’), Ariss v FCT [2019] AATA 2958 (‘Ariss’ case’) and Douglass v FCT [2019] FCA 1246 (‘Douglass’s case’) we will review the tests associated with the PSI rules.
Central to the application of the PSI rules is whether the relevant income derived by the individual or personal services entity (PSE), is PSI. PSI is defined as follows:
“your ordinary or statutory income, or the ordinary or statutory income of any other entity
is your personal services income if the income is mainly a reward for your personal effort
and skills (or would be such a reward if it was your income).”
The reference to “mainly” means “chiefly”, “principally” or “more than half”. Therefore, an
individual or PSE will be considered to derive PSI where more than half of the income in question represents a reward for the personal efforts or skills of the individual.
Notably, PSI derived by an individual or PSE is unable to be split. This is because it will always be assessable to the individual who generated it (i.e., the individual will either be taxed directly, or in the case of a PSE, via attribution and/or the prompt payment of salary wages).
As mentioned, a key exception to the application of the PSI rules is where the individual or PSE deriving the PSI is conducting a PSB.
In the absence of a personal services business determination (’PSBD’) from the Commissioner, a PSB is essentially an individual that derives PSI or a PSE (i.e., a company, trust or partnership whose income includes the PSI of one or more individuals), and passes either:
- the results test, or
- the 80/20 test
and either:
- the unrelated clients test,
- the employment test, or
- the business premises test
Where an individual that derives PSI, or a PSE is unable to satisfy the requirements to be classified as a PSB, the PSI rules will apply. Where the PSI rules apply, income generated by the PSE cannot be split and generally only appropriate ‘employee-type’ deductions can be claimed by the individual or PSE in respect of the PSI.
As this may be a lot to get your head around, it is important to consult with your tax accountant who can assist you in navigating the PSI maze.
Need Help?
If you would like help in respect to PSI or the PSI tests, please contact one of our experienced tax accountants by clicking here to submit an online enquiry form, calling us on 1300 QUINNS or alternatively, +61 2 9223 9166 to arrange a teleconference or appointment.
