What is PSI?
Personal services income (PSI) is income that you receive, or that another entity receives, where the income mainly comes from your own personal effort or skills. For example, this includes income you earn as an independent contractor, or income that is paid to a company or trust through which you provide your personal services.
The PSI rules are integrity rules designed to improve fairness in the tax system. They prevent people who are not carrying on a personal services business from:
- diverting their PSI to an associated person or entity who would pay less tax on that income, and
- claiming deductions for expenses they would not be able to claim if they had earned the PSI as an employee.
Who Can Earn PSI?
You can receive PSI in almost any trade, profession, or industry. Here are some common examples but are not limited to:
- Engineers
- Financial professionals
- Information technology consultants
- Construction workers
- Medical practitioners
As PSI is a reward for an individual’s personal skills or efforts, only individuals can receive PSI. They can receive PSI either directly as a sole trader or through another entity such as a partnership, company, or trust. When an individual receives PSI indirectly through another entity, that entity is considered a personal services entity (PSE).
Work Out If the PSI Rules Apply to You
If you have worked out that the income you have earned is PSI, the next step is to work out whether the PSI rules apply to you. To do this, you should work out if you are a personal services business in the year that you earned PSI. If you self-assess as a PSB, you need to check if:
- You pass the results test for at least 75% of your personal services income (PSI), or
- You pass one of the other PSB tests and no more than 80% of your PSI comes from one client (including their associates).
The other PSB tests are the employment test, unrelated clients test, and the business premises test. If you are a trust, partnership, or a company and have more than one individual producing PSI, the self-assessment rules and PSB tests must be applied to each individual. One individual can conduct a PSB but not another. If you can’t self-assess as a PSB for a specific income year, you can apply for a PSB determination (PSBD) in some scenarios.
If you self-assess as a PSB or have a PSBD, then no PSI rules will apply to the PSI you earn in that income year. If you can’t self-assess as a PSB and don’t have a PSBD for a specific income year, the PSI rules will apply. The PSI rules will not affect:
- Your contracts with clients or customers will stay the same – for example, you don’t become their employee and you don’t stop being a contractor.
- You can still have an Australian Business Number (ABN) and be registered for GST.
- You may still be considered to be running a business.
This flowchart is useful to determine whether the PSI rules apply to you or your business. If you are still not sure, you can seek further advice from Tax Consulting Partners.
What If the PSI Rules Don’t Apply
Even when the personal services income (PSI) rules don’t apply, you still have to declare any PSI amounts at the relevant labels on your tax return. If you earned PSI but later found that the rules don’t apply, there are no changes to the deductions you can claim against the income. If you have entered into an arrangement where the primary purpose is to receive a tax benefit, then the PSI rules don’t apply, but the general anti-avoidance rules may apply.
Conclusion
If you receive PSI, you must understand when the PSI rules apply and when they don’t apply to you. If you still have any queries, you can get in touch with Tax Consulting Partners.
