Watch out for the personal services income (PSI) rules which aim to tax business profits in the name of the person doing the work. They can often apply to contractors, consultants and professionals. Do they apply to you?
If you are running a business it is important to establish if the PSI rules apply. PSI is income produced mainly from your personal skills or efforts as an individual.
There are 4 steps in determining if the PSI rules apply
1. Have you received PSI?
In this step you need to establish what percentage of income earned from each contract/job performed was for your labour, skills knowledge & expertise, as well as what percentage relates to materials supplied and/or tools equipment used.
• If more than 50% of the income relates to labour, skills and/or expertise, then all your income for that job/contract is PSI.
• If less than 50% of the income was for labour, skills and/or expertise then none of the income for that job/contract is PSI.
If any of the income you received is PSI proceed to step 2, if not then the PSI rules do not apply.
2. Results Test
The results tests focuses on establishing the nature of your contracted performance and the basis you are paid. To pass the results tests you need to meet the following conditions:
• You are paid to produce a specific results or outcomes
• You are required to provide equipment or tools.
• You are required to fix mistakes at your own costs.
Your business contracts must meet these conditions for at least 75% of your PSI for the year in order to pass. If you pass the test your business is a personal services business and the PSI rules don’t apply.
If you don’t pass, move on to step 3.
3. The 80% rule
This test requires you to work out the PSI that comes from each client and their associates in an income year.
• If less than 80% of your PSI comes from one client continue to step 4.
• If 80% or more of you PSI income comes from one client then the PSI rules apply.
4. The remaining tests
• Unrelated clients test: To pass this your PSI must be earned from two or more unrelated clients and contracts must be sourced through offers/advertising to the public
• Employment test: To pass this your employees or contractors must perform at least 20% of the principal work
• Business premises test: To pass this your business premises must be used for personal services work, must be used exclusively for your business, is physically separate from your home and is separate from your clients
Pro Tips
Don’t be fooled! The use of more complex business structures does not stop your income from being assessed as PSI.
You can receive PSI in almost any industry trade, or profession, so be sure to work through the steps even if your profession isn’t synonymous with PSI.
Author: Heather Cox
Email: heather@faj.com.au
