Personal services income
 The
Personal Services Income (PSI) rules are specifically designed to prevent
normal wage and salary earners setting up a business and claiming deductions
available to businesses when they derive the vast majority of their income
from a single source.
A recent ruling
The Administrative Appeals Tribunal recently upheld a decision by the Tax
Commissioner to refuse to consider a company to be a Personal Services
Business (PSB). The issue involved the main service contract being with the
director of the company (as an individual) and not with the company.
Therefore, since it was the director who provided the services and not the
company, the Commissioner found that the company did not satisfy PSB
criteria and hence was not eligible to claim the advantages available to a
company for that contract.
Understanding PSI
PSI is derived mainly as a reward for personal effort or skills, not for the
supply of products, and is more likely to be recognised if you have minimal
business assets and few employees. In effect, many individuals in the
workforce earn PSI such as engineers and IT contractors. However, unless
they are able to pass the PSB requirements, they cannot claim many of the
deductions available to businesses.
PSB requirements
To qualify as a PSB you must satisfy the Results Test. Alternatively, you
must pass the 80% Test and then also pass at least one of the following: the
Unrelated Client Test, the Employment Test or the Business Premises Test.
You may also seek a specific PSB Determination from the ATO.
A summary of the PSB requirements is as follows:
Results Test
All of the following must apply to at least 75% of PSI:
You produce a result e.g. a completed software component
You supply all the tools required for the work
You are responsible for the cost of rectifying defects in the work
OR
80% Test
No more than 80% of PSI may be derived from one source during the year.
Plus one of the following
Unrelated Client Test
You must earn your PSI from two or more entities that are not related to
you or each other. These clients must be obtained from direct means such as
advertising or tendering.
Employment Test
You must satisfy one of the following:
You employ an apprentice for at least half of the year
Other unrelated persons perform at least 20% of the total principal work
Business Premises Test
You must maintain business premises used for the activities that earn PSI,
for the entire year. They must be separate from your private residence and
your client’s premises.
Anti-avoidance provisions
Even if you are conducting a PSB, anti-avoidance provisions apply if you
split income with a relative or another entity and the income included in
your tax return is not commensurate with the services you provide and the
responsibilities you undertake.
The PSI rules have been designed for a specific purpose but they can cause
confusion. Please consult Saward Dawson if you believe your business should
be eligible for PSB status.
Published : 2 September 2005
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