Employment
Personal services income
Personal services income is income earned mainly as a reward for an individual's personal efforts or skills, and special rules limit the deductions and income splitting available.
Personal services income, usually shortened to PSI, is income that is mainly a reward for an individual's personal efforts or skills. It arises when a person, often a contractor or consultant, is paid for their own labour or expertise rather than for the sale of goods or for the use of business assets. The income may be paid to the individual directly or to a company, partnership or trust through which the individual provides the service.
The PSI rules were designed to prevent people from using a business structure to split income or claim deductions that an ordinary employee could not. For example, a contractor who works mostly for one client might channel the income through a company and pay a family member a share. The PSI rules look through the structure to the individual who earned the income, and can attribute it back to them.
The first question is whether the income is PSI at all. If less than half of the payment is for the individual's personal efforts, and the rest is for materials, equipment or the work of others, it may not be PSI. Where it is PSI, the next step is to see whether the person is conducting a personal services business. There are tests, including the results test, the unrelated clients test, the employment test and the business premises test. The first, the results test, is commonly used by trades and some consultants.
If the person meets a test, they are treated as running a personal services business and the PSI rules do not limit their deductions in the same way. If they fail all the tests, and no determination is made by the ATO, the PSI is attributed to the individual, and deductions such as rent, mortgage interest, and payments to associates for non-business work are restricted. The ATO can also issue a personal services business determination in some circumstances.
GST works independently. Whether or not income is PSI, the supplier's GST registration depends on the GST turnover test. A contractor earning PSI above $75,000 of GST turnover must register, and charge GST on the services they supply. A PSI individual who is an employee under the usual tests is in a different position again, because wages are not subject to GST.
A common misunderstanding is that the PSI rules only apply to tradespeople or IT contractors. They apply to anyone whose income is mainly for personal effort, such as consultants, designers or health practitioners working through a structure. Another mistake is assuming that having an ABN is enough to qualify as a personal services business.
This is general information only, so confirm how the PSI rules apply to you with the ATO or a registered tax professional.
Worked example
Chris, an IT consultant, trades through a company and gets $120,000 a year from one client, mainly for his own work. He uses the results test: he is paid for delivering projects, uses his own equipment and fixes defects at his own cost. If he meets the test, he is running a personal services business. If not, the income may be attributed to him personally, limiting deductions such as a $9,000 payment to his spouse for non-business work.
Practical tips
- Check each year whether your income is PSI and whether you meet a personal services business test. Keep records to support the answer.
- Do not make payments to family members through a structure without confirming that the work was real and that the PSI rules allow it.
- Ask a registered tax professional before setting up a company or trust for contracting work, since structure does not remove the PSI rules.