Q & A – PERSONAL SERVICES INCOME

Posted on 22nd September 2017 by Christabelle Harris

Q: what is Personal services income (PSI)?

A: PSI is essentially any income earned from your personal skills or efforts regardless of your business structure (sole trader, partnership, company or trust). If PSI income has been received the relevant rules may apply to you.

If income earned through your business is deemed to be PSI then this income cannot stay in the entity, it must be paid out to the PSI individual as an ‘attributable wage’, in doing so reducing the net profit of the business to nil and preventing any form of income splitting. If the income is not deemed to be PSI the profits can stay within the entity and be taxed accordingly.

Occupations generally affected by the PSI legislation include:

• Builders
• Doctors
• Architects
• Engineers
• Cleaners
• Surveyors
• Consultants

Q: How to work out whether your income is PSI?

A: There are a series of steps in place to determine if these rules apply to you, as listed below.

First, you must determine if more than 50% of the income received from a particular job or contract was for your own services, labour, skills or expertise (as opposed to supply of materials and/or tools and equipment). If so, then all of the income from that job or contract is deemed as being PSI. If not, then the PSI rules do not apply to you.

If you do have PSI income then the below tests must be completed to ascertain whether or not you are running a Personal Services Business (PSB) and therefore allowed to retain the income in your entity:

The Results test – to satisfy the results test the following 3 conditions must be met for at least 75% of the income. If you pass this test the business income derived is not subject to PSI rules:

1. You must be paid to produce a specific result or outcome prior to being paid
2. You are required to supply the necessary plant & equipment or tools to complete the service
3. You are required to fix any mistakes at your own expense or pay someone else to fix them at any time during the contract

If you pass this first test then the PSI rules don’t apply to you. However, if you don’t pass this first test the following Steps are to be continued:

The 80% rule – For this step you must determine how much of the PSI income being tested comes from any one client/contract

1. If less than 80%, continue onto step 3
2. If more than 80%, PSI rules apply (unless you think you may be eligible for a special determination from the ATO) and any income earned will be attributable to you

If you do not pass the results test but do pass the 80% rule, then you will just need to pass any one of the three additional tests:

1. Unrelated clients test: Income received must be from at least two unrelated clients
2. Employment test: Do you employ someone who earns at least 20% of the business income?
3. Business Premises: Do you have a separate business premises used solely for your business (physically separate from your home and used exclusively for your business).

If you meet one of the above tests the PSI rules do not apply, if not the PSI rules will apply and any income earned will need to put included in your personal Tax Return as an attributable wage.