What is PSI?
Personal Services Income (PSI) is mainly a reward for an individual’s personal efforts or skills, and can affect the tax obligations of contractors and consultants.
PSI rules affect the individuals deriving PSI directly as a sole trader or indirectly through a company, trust or partnership (referred to as a Personal Services Entity or PSE).
Many consultants and contractors operate through a company, partnership or trust and in many cases the income received for the work they’ve undertaken may be classified as PSI. To know if your business is receiving PSI, you need to look at the income from each contract you complete and work out what percentage of the payment is for:
• The skills, knowledge, expertise or efforts of those who performed the services- that is, the labour component.
• The materials supplied and/or tools and equipment used to complete the job.
If you work out that more than 50% of the income you received is for the skills, knowledge, expertise or efforts of the individuals who performed the services, then the income for that contract is PSI.
If this is the case, there are a series of tests you must use to work out if the PSI rules apply to this income. These are the:
• Results test
• Unrelated clients test
• Employment test
• Business premises test
The ATO is paying close attention to those who receive PSI, particularly those operating through a PSE, as they believe many are using them as a tax avoidance scheme. The ATO is undertaking data matching activities with employment agencies to ensure that the PSI rules have been properly adhered to.
It is best to speak to your accountant about PSI to ensure you do not breach the legislation and end up being audited by the ATO.
If you have any questions or issues in relation to PSI, our dedicated tax lawyers and tax accountants can assist you with your enquiry. Contact us on +61 2 9223 9166 or visit our website www.quinns.com.au and submit an online enquiry.
