Is more than half of your income generated from a contract due to your personal efforts or skills, rather than from the use of assets, selling goods, or a business structure? If so, your income is considered Personal Services Income (PSI).
What is Personal Service Income (PSI)
Personal services income (PSI) is income primarily generated from your personal skills or efforts as an individual. To determine if your income qualifies as PSI, you should assess the income received from each individual contract or invoice.
- If more than 50% of the income from a contract or invoice is for your labour, skills, or expertise, then all of the income is classified as PSI.
- If 50% or less of the income from a contract or invoice is for your labour, skills, or expertise, then none of the income is considered PSI.
You can receive PSI in almost any industry, trade, or profession. For example, PSI can be earned by financial professionals, IT consultants, construction workers, or medical practitioners. Consider David, who charges $250 for a plumbing job. For the tools he supplied, he charges $60, and the rest is for his labour. Since David earned more than half of his income for the job through his personal efforts or skills, the income is considered PSI.
Salary and wages as an employee and some other types of income will not be affected by the PSI rules.
If you earn PSI, you’ll need to work out if you are a personal services business (PSB) in the year that you received the PSI. This will affect the deductions you can claim. You can self-assess as a PSB through the Australian Taxation Office (ATO) if you:
- meet the results test in relation to at least 75% of your PSI, or
- meet one of the other PSB tests and less than 80% of your PSI is from the same entity and its associates.
Note: If you are earning PSI, you can use the results test to self-assess as a personal services business (PSB). This can be completed through the ATO.
The PSI rules will not affect:
- the contractual relationships between you and your clients or customers – for example, you do not become an employee or stop being a contractor
- your entitlement to an Australian business number (ABN) or registration for goods and services tax (GST)
- whether you are still considered to be running a business.
What To Do When the PSI Rules Apply
PSI needs to be attributed if it is earnt through a company, partnership or trust and the PSI rules apply.
If your business operates as a company, partnership or trust, and the personal services income (PSI) rules apply: You need to attribute or treat any PSI received as belonging to each individual who produced the income.
If your business operates as a sole trader: You do not need to attribute PSI, as the income is already reported in your individual tax return.
General Anti-Avoidance Rules and PSI
The general anti-avoidance rules (GAAR) ensures the failure of blatant, artificial or contrived arrangements to obtain tax benefits. The GAAR is assessed based on the objective facts and circumstances of each case. It applies where a taxpayer enters into a scheme for the sole or dominant purpose of obtaining a tax benefit. In certain circumstances, the GAAR may apply to your personal services income arrangements.
The GAAR may apply where there are factors indicating that the dominant purpose of the arrangement is to obtain a tax benefit by diverting, alienating or splitting the PSI or retaining profits in the lower-taxed company, partnership or trust (being an interposed entity).
Several factors are considered when determining whether a taxpayer has engaged in income splitting to gain a tax advantage. We recommend consulting a professional taxation accountant for advice tailored to your specific situation.
Find Out if You Have Earned PSI
To determine how the PSI rules apply to your or your business, we recommend speaking to an expert taxation accountant, like the team at The Quinn Group. To arrange an appointment, contact us on 1300 QUINNS (1300 784 667) or +61 2 9223 9166, or submit an online enquiry to arrange an appointment.
