Personal Services Income

Personal Services Income (PSI) is income which is derived mainly as a reward for personal effort or skills. In determining whether you derive PSI, you should consider the following:

	PSI relates more to the supply of services rather than the supply of goods
	PSI tends to require greater dependence on skill and judgement
	PSI is more likely to arise if you have minimal assets and few employees.

The Government believes that most computer consultants derive PSI even if they are operating through an entity, such as a company. However, courier drivers of trucks and vans do not usually derive PSI.

The PSI legislation aims to prevent taxpayers splitting income with other entities or individuals, such as companies, trusts and spouses, to reduce their tax. If the PSI rules apply, contracting and other PSI income is still taxed to the individual. Deductions are also largely limited to those which can be claimed by employees.

Even if the specific PSI rules do not apply, be aware that the general anti-avoidance provisions in the Tax Act may still apply to prevent income splitting.

The following are examples of PSI:

	Contracts wholly or principally for labour or services of a person
	Consultants who derive income from their skills eg. computer and engineering consultants
	Professional persons practicing on their own account without professional assistance eg. accountants, lawyers and doctors.

Examples of non-PSI are investment income, sale of goods and payments for the use of assets.

Personal Services - Business Tests

Even if a taxpayer does derive PSI, the specific PSI rules do not apply if the taxpayer carries on a personal services business. This is a business that satisfies the results test or meets the 80% test and one of the three other tests discussed below, or has a Determination from the Taxation Office.

Results Test

A taxpayer will satisfy the results test where all of the following three conditions are met in respect of at least 75% of the personal services income:

	The taxpayer produces a result (eg delivering a completed software component, as contrasted with performing a week of programming work)
	The taxpayer is required to supply all the tools required to perform the work
	The taxpayer is liable for the cost of rectifying any defect in the work performed

80% Test

This test is failed if more than 80% of your personal services income for the year is from the one source. If you pass the 80% test, you must also pass one of the following three tests to be classified as a personal services business.

Other Tests

1. Unrelated Clients Test
The unrelated clients test is passed where you earn your PSI from two or more entities that are not related to you or related to each other. However, you must obtain these clients through direct means such as advertising or tendering.

2. Employment Test
You meet the employment test if you satisfy one of the following:

	You employ an apprentice for at least half of the year
	Other unrelated/non-associated persons perform more than 20% of the total principal work (principal work excludes administration and support services)

3. Business Premises Test
The business premises test is passed if at all times during the income year you maintained business premises used exclusively by you for activities that earn PSI. The premises must be physically separate from you or your associate’s private premises or a premise of your client.

Personal Services Business Determination

If you fail the 80% test, the PSI regime applies unless you obtain a Determination from the Taxation Office that you are conducting a personal services business. Completing an application for a Determination is time consuming and requires disclosure of substantial amount of information about the business and its operations. You must also satisfy certain tests before you can apply. If you think you may need a determination, please contact us for assistance.

Deduction Limitations

If you are receiving PSI and not conducting a personal services business, the PSI regime will apply to limit the deductions you can claim.

Individuals

	Deductions are largely limited to expenses that are deductible to employees. For example, you cannot claim home to office travel.
	Wages and superannuation paid to an associated person or entity for non-principal work are not deductible. Example: spouse wages for bookkeeping.
	Deductions are not allowed for rent, mortgage interest, rates or land tax on your residence or an associate’s residence.
	You can still claim deductions for expenses that are specifically deductible under other legislation. These include income protection and public liability insurance, your superannuation contributions, wages, superannuation and WorkCover for non-associates or associates who perform principal work.

Entities

In addition to the above, expenses termed ‘Entity maintenance costs’ such as bank charges, accounting fees, ASIC fees and government registration fees are deductible but must first be offset against non-PSI income such as interest. Any excess is then an allowable deduction against PSI.

Attribution

If the PSI is derived by an entity, such as a company, trust or partnership, and the entity is not carrying on a personal services business, the net PSI of the entity is “attributed” to the individual. This means the income is included in the tax return of the individual rather than the entity.

Alternatively, the entity can pay out the PSI promptly (within 14 days after the end of the PAYG period) as salaries to the individual. The relevant PAYG withholding tax must be withheld from the salaries. If you do not pay out all PSI as salaries, you must still remit PAYG withholding each period on the remaining attributed income. Please contact us for advice on calculating the required quarterly tax.

General Anti-Avoidance Provisions

If a taxpayer is deriving PSI, but is conducting a personal services business (i.e. they meet the tests described above), the attribution rules will not apply. However, taxpayers are still subject to the general anti-avoidance provisions, known as Part IVA. These provisions can apply if you enter into an arrangement where the dominant purpose is income splitting.

The Taxation Office has stated that the anti-avoidance provisions may apply if you split income with a relative or another entity and the income included in your tax return is not commensurate with the value of the services you provide and the responsibilities you undertake. You can remunerate an associate for services they provide in helping you derive your PSI but you should ensure the amount is commercially realistic.

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Published : 15 April 2008