Personal Services Income (PSI): A recap

What is PSI?

Personal Services Income (PSI) is a tax concept that covers income produced mainly from your personal skills or efforts as an individual.

You can receive PSI in almost any industry as a trade or profession. Common examples include financial professionals, information technology consultants, engineers, construction workers and medical practitioners. Often we see these types of professionals or tradespeople structuring their business to run through an entity being either a trust, a partnership, or a company.

When comparing tax rates, a small company’s is just 28%, which is more favourable with the top personal tax rate of 47%.  Understanding these differences we can see why this regime was introduced on 1 July 2000.

The policy was made to address:

• diverting income derived from personal services to a company, partnership or trust which would otherwise be taxable to them personally;
• splitting income earned from personal services with other family members; and
• gaining taxation advantages such as claiming business deductions.

Inclusions & Exclusions

PSI can include:

• salary or wages;
• income payable under a contract which is wholly or principally for labour or services of a person, and income derived by consultants from the exercise of personal expertise.

PSI does not include:

• income that is mainly generated by the use of assets, the sale of goods, or a business structure;
• income derived as an employee or office holder; or
• income derived as part of a personal services business. There are a series of tests for determining whether such a business exists.

Examples

To explain these concepts further the following examples are taken from tax legislation:

1. NewIT Pty Ltd provides computer programming services, but Ron does all the work involved in providing those services. Ron uses the clients' equipment and software to do the work. NewIT's ordinary income from providing the services is Ron's personal services income because it is a reward for his personal efforts or skills.
2. Trux Pty Ltd owns one semi-trailer, and Tom is the only person who drives it. Trux's ordinary income from transporting goods is not Tom's personal services income because it is produced mainly by use of the semi-trailer, and not mainly as a reward for Tom's personal efforts or skills.
3. Jim works as an accountant for a large accounting firm that employs many accountants. None of the firm's ordinary income or statutory income is Jim's personal services income because it is produced mainly by the firm's business structure, and not mainly as a reward for Jim's personal efforts or skills.

If these rules apply, they can affect how you report your income to the ATO and the deductions you can claim.

If you think that these rules may apply to you, or you would like more information, our team at BLG Business Advisers will be able to assist you. Get in touch with us online or call (02) 4229 2211.