Understanding personal services income (PSI)
As tax accountants, we are often asked ‘when does personal services income (PSI) relate to me and what does it mean?’ by businesses operating in the service industry. In this article, we answer six frequently asked questions to unpack the fundamentals of PSI.
Who does personal services income impact?
Any business that has more than 50% of the invoice made up of personal labour, skill or expertise will likely be considered PSI.
Which industries are most impacted by personal services income?
Service-based industries are most likely to be impacted by these rules, some examples include (but are not limited to):
- Information Technology
- Accountants
- Lawyers
- Engineers
- Consultants
- Construction workers
- Medical professions
Can I split my income if operating through a corporate structure and earning personal services income?
If your business is deemed to be earning PSI, income should be attributed to the individual who has generated the income. In some instances, if operating through a corporate structure (i.e. company, trust, partnership), the PSI rules from a tax perspective require any income and expenses reported through the structure to be effectively ignored and reporting to be made directly in the individual’s tax return.
What is the difference between personal services income and personal services business?
PSI is derived when over 50% of your income is based on your labour. If this applies, you then need to determine whether this income constitutes a personal services business (PSB). The benefit of being a PSB is this does not require direct reporting of income and expenses in the individual's tax return, and additional PAYG withholding requirements.
What tests determine if you are a personal services business?
In summary, common tests to determine whether you are a PSB include:
- Does 80% of your income come from one client or source
- Results test – are you paid to produce a specific result, provide your own equipment and required to fix your own mistakes
- Unrelated clients – do you have 2 or more unrelated clients and advertise your services to the public
- Employment test – do you employ people to generate part of your assessable income
- Business premises test – do you operate from a business premise used solely for work purposes
A combination of the above tests need to be passed when assessing PSB.
If I qualify as a personal services business, can I split my income?
If you qualify as PSB, it is the Australian Tax Office’s (ATO) view that this still may not be sufficient reason to split any income your business generates from PSI. The ATO have a catch-all provision called Part IVA, which focuses on whether the sole reason for splitting income with a spouse or retaining profits in a company is to minimise tax payable that otherwise would have been earned by the individual in an employed or sole trader business. The ATO could use Part IVA to argue to sole reason you are undertaking this action is to obtain a tax benefit. This is not to say in some instances income spltting can be achieved but it does depends on the specific circumstances of each case.
You can find more information on personal services income on the ATO’s website.
Please feel free to contact us if you have any questions or require further guidance.