PSI for Companies, Partnerships and Trusts

WORKING OUT IF THE INCOME YOUR BUSINESS RECEIVES IS PERSONAL SERVICES INCOME (PSI).

Many consultants and contractors operate their business through a company, partnership or trust. In many cases, the income received for the work they do may be classified as PSI. If you are an employee only earning salary and wages (that is, working for an employer and not under an ABN), do not read any further. This information does not apply to you.

Personal services income (PSI) is income that is mainly (more than 50%) a reward for the skills, knowledge, expertise or efforts of the individuals who performed the services. A personal services entity is a company, partnership or trust whose income includes the personal services income of one or more individuals.

To know if your business is receiving PSI, you will need to look at the income (or reward) from each contract you complete, and work out what percentage of the payment is for:

• the skills, knowledge, expertise or efforts of those who performed the services – that is, the labour component
• the materials supplied and/or tools and equipment used to complete the job.

If you work out that:

• more than 50% of the income you received is for the skills, knowledge, expertise or efforts of the individuals who performed the services, then the income for that contract is PSI
• 50% or less of the income received is for the skills, knowledge, expertise or efforts of the individuals who performed the services, then the income for that contract is not PSI.

Your business income can be a mixture of PSI and other income (non-PSI). So, it is important to look at the income you received from each separate contract to work out whether it is PSI. The terms and conditions of the contract as well as invoices and written agreements (which show the arrangement you have for the work) are important in working out whether the income is PSI or not.

You can receive PSI by performing services in any industry or occupation. This includes income:

• of a professional practising on their own account without assistance – for example, a medical practitioner in a sole practice
• payable under a contract where the labour or services of a person make up more than 50% of the value, for example, contractors in the building, IT and transport industry
• of a professional sports person or entertainer from the exercise of their professional skills (this does not include income from endorsements)
• of consultants, for example, computer consultants or engineers from the exercise of personal expertise
• of a commission agent who contracts with a supplier to sell goods on their behalf.

PSI rules only apply to PSI. If your business receives PSI, then certain rules (known as the PSI rules) may apply where:

• your business cannot claim certain deductions against the PSI.
• the PSI (less relevant deductions) your business received will need to be attributed (treated as belonging) to each individual who performed the services – that is, the profits can’t be retained in the business
• your business needs to meet certain tax return obligations
• your business may have additional pay as you go (PAYG) withholding obligations.

To work out if the PSI rules apply, your business needs to work through a series of tests:

• results test – use this test first to work out if you’ve received the income after achieving a specific result or outcome
• unrelated clients test – use this test to work out if you have received the income from two or more clients who are not connected or related
• employment test – use this test to work out if others were employed or contracted to help complete the work that generates the PSI
• business premises test – use this test to work out if the location and usage of your business premises meet certain criteria.

If you do not pass the results test, you need to apply an additional rule, called the 80% rule, to work out if 80% or more of your income comes from one client.

Attached is a step by step flowchart that shows you how to work out if the PSI rules apply to the PSI your business receives. PSI rules apply when you have not passed any of the tests and you do not have a determination from the ATO.

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If the PSI rules apply, this means you (company, partnership or trust):

• won’t be able to claim certain deductions against the PSI
• need to meet certain tax return obligations
• need to attribute (treat as belonging) the income to the individuals who performed the services (that is, you can’t retain the profits within the business)
• may have additional pay as you go withholding obligations.

If you need further assistance or would like to discuss any of the above please do not hesitate to contact us.