If you earn income mainly from your own skills or efforts, such as consulting, IT contracting, engineering or locum work, the personal services income (PSI) rules may affect how much tax you pay and what you can claim. Here is how they work.
What is personal services income?
Income is PSI when it is mainly (more than 50%) a reward for your personal efforts or skills, rather than for supplying goods, using assets or the work of a business structure. It can be earned as a sole trader or through a company, trust or partnership.
When do the PSI rules apply?
The PSI rules apply unless you are conducting a personal services business. You are treated as running a personal services business if you:
- meet the results test, or
- receive less than 80% of your PSI from one client (and their associates) and meet at least one of the other tests, or
- hold a personal services business determination from the ATO.
The four personal services business tests
- Results test: for at least 75% of your PSI you are paid to produce a result, you provide your own tools or equipment, and you are liable to fix defects.
- Unrelated clients test: you provide services to two or more unrelated clients as a direct result of offering your services to the public.
- Employment test: you engage others (who are not associates) to do at least 20% of the principal work.
- Business premises test: you maintain and use business premises that meet specific conditions, separate from your home and your clients.
If 80% or more of your PSI comes from one client and you do not meet the results test, you need a determination from the ATO to be treated as a personal services business.
What happens if the rules apply?
- Some deductions are limited, such as rent, mortgage interest and rates for your home, and certain payments to associates.
- If you earn PSI through a company, trust or partnership, the net PSI is generally attributed to you and taxed at your personal rates.
- You still report the income in the PSI section of your tax return.
Even if you pass a test, the general anti-avoidance rules can still apply to arrangements that split income with family members, so structure decisions need care.
What to do next
If you contract through a company or trust, or are thinking about setting one up, talk to us before the end of the financial year. We will check which tests you meet and whether your structure still makes sense. Book a free 20-minute call.