Update:
New tax ruling 2022/3 released by the Australian Taxation Office (ATO) combines two previous tax rulings – 2001/7 and 2001/8 – in relation to the application of the Personal Services Income (PSI) rules. This combination of the two previous rulings provides the ATO’s finalised concepts of Personal Services Income and Personal Services Businesses (PSB).
The original PSI rules operated to ensure individuals cannot reduce their personal income tax by alienating their income through the use of a Personal Services Entity (PSE), such as a company, trust or partnership.
What is Personal Services Income (PSI)?
PSI = Income that results predominately from an individuals personal efforts or skills, including salary & wages, labour hire contracts, and consulting income earned from individuals applying their expertise.
How does it work?
When considering income as PSI, being earnt through an entity such as a Trust or through an entity such as a Trust or Company, it is taxed at the marginal rate and attributed to the individual.
Additionally, deductions are generally limited to an individual employee, resulting in the possibility of some business deductions being denied, such as payments to associates for non-principal work performed.
Furthermore, if more than 50% of income received is under a particular contract for personal efforts and/or skills of the individual, then the entire contract would be considered to be PSI. A business structure is irrelevant when it comes to PSI, with the rules equally applied where PSI is being earnt through a PSE such as a trust or company. To avoid PDI rules applying, the PSE must have the income paid to the individual as a salary or wage, or be qualified to be carrying on a PSB.
What is a Personal Services Business (PSB)?
To be considered as a PSB and not be subject to the attribution rules, the business must either meet the results test or pass the 80% rule.
Results Test
Pass = At least 75% of PS earned the business needs to meet all three of the below:
- Individual is liable to cover the costs of rectifying any defects in the work
- Individual is required to provide own equipment or tools (if applicable)
- Individual is contracted to produce a specific result
If these three components are failed to be met, the results test will not be passed, resulting in the 80% tests to be considered.
80% Test
Pass = 80% of more of total income received in the income year must not come from one client or their associate. If the 80% test is passed, then one of the below must too be passed:
- Business Premises Test – The PSE has a separate business premises, physically separate from both the private residence of the individual and the client.
- Employment Test – The PSE mist either employ another party to perform at least 20% of principal work or employ one or more apprentices for at least 6 months.
- Unrelated Clients Test – The PSE has 2 or more unrelated clients and the work has been obtained by offering it directly to the public.
If the PSE fails both the results test and the 80% test, the remaining option is to obtain ATO determination of the business qualifying as PSB.
Think you may be affected by the PSI rules? Contact our friendly team to discuss how the rules apply to you and your situation.
