Personal Services Income (PSI)

On Monday we had tax specialist Tony Evans give a 3 hour presentation to our tax team on Personal Services Income (PSI) and the important decisions from tax case rulings in the last quarter.

Tony discussed in detail what is classified as PSI, how there are subtle variations in work performed or how a change in income is reported and taxed, depends on how the entity operates.

PSI was introduced in 2000 to deter taxpayers splitting income for tax avoidance purposes.
PSI arises when the majority of your income is for the skills, knowledge, expertise or efforts of the person who performed the services.

If you receive PSI, there may be rules that apply that limit deductions and affect reporting obligations.

PSI Testing
If you do receive PSI, there are five tests that can be applied that if passed, result in the PSI rules not applying, they are:

  • Results test
    To meet the results test, income you receive under a contract or arrangement must be paid to you for achieving a result i.e. engaged to complete a job and paid on completion of that job.
  • 80% test
    If 80% or more of an individual’s PSI in the income year is from one client (and their associates), you cannot decide for yourself if you meet the other tests. You must obtain a personal services business determination from the ATO or the PSI rules will apply.
  • Unrelated clients test
    Services must be provided as a direct result of making offers to the public i.e. advertising to general public
  • Employment test
    There must be employees or other contractors undertaking at least 20% of the principal work, or must have hired an apprentice for a total period of six months.
  • Business premises test
    If business premises are owned or leased by the business, used for PSI more than 50% of the time, used only by the business and individual who generate PSI, is physically separate from residences of the individuals and physically separate of clients.

Getting advice in this area from a specialist allows the tax team to gain a deeper understanding on what the reporting obligations around PSI are. The knowledge gained from these sessions creates a higher likelihood of correctly classifying income which will reduce the risk of audits for our clients.

The tax rulings Tony goes through gives us an insight into where the ATO are focusing their audits, and allows us to see how taxpayers have attempted to get around the system.
For the taxpayers that are successful in court, it gives us evidence of what structures and tax planning can be successful under audit conditions.

For more on Personal Services Income, speak to Josh or one of our taxation specialists.

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