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Personal Service Income

Personal Services Income (PSI) is income that is mainly a reward for an individual's personal efforts or skills

Examples of PSI include:
  • income of a professional practitioner in a sole practice

  • income payable under a contract which is wholly or principally for the labour or services of a person

  • income derived by a professional sportsperson or entertainer from the exercise of professional skills

  • income derived by consultants from the exercise of personal expertise
Results Test

Under s.87-15 an individual or personal services entity (PSE) that satisfies the results test is considered to be conducting a personal services business and is exempt from the personal services regime

The results test will be satisfied in an income year if, in respect of at least 75% of the PSI of the individual doing the personal services work, having regard to the custom or work practice when work of that kind is performed:
  • the PSI is paid to achieve a specified result or outcome under a contract or arrangement, and

  • the individual provides the tools or equipment necessary (if any) to do the work, and

  • the individual is liable for the cost of rectifying defects in work performed

The 80% rule

If the results test is not satisfied, it is necessary to consider the 80% rule – s.87-15

The 80% rule operates as follows:
  • if 80% or more of an individual’s PSI is from one client in an income year, then that income is subject to the PSI regime unless a PSB determination has been obtained

  • if 80% or more of an individual’s PSI is NOT from one client in a year of income, then that income is exempt from the PSI regime if any of the following tests are satisfied:

    • the unrelated clients test

    • the employment test

    • the business premises test
Definition

PSI does not include income that is mainly:
  • for supplying or selling goods (e.g. from retailing, wholesaling or manufacturing)
  • generated by an income-producing asset
  • for granting a right to use property (e.g. the copyright to a computer program)
  • generated by a business structure (e.g. an accountant working for a large accounting firm)
Only individual taxpayers can have PSI

If PSI is channelled through a company, partnership or trust (i.e. a personal services entity or PSE), it is still the individual's personal services income for income tax purposes

Personal Services Business (PSB)

Under s.87-15, a taxpayer’s business qualifies as a personal services business if:
  • it meet the results test, or

  • less than 80% of the individual’s PSI in an income year comes from any single source and any of either the unrelated clients test or the employment test or the business premises test are met, or

  • a PSB determination is obtained from the FCT confirming that the business is a personal services business

Income derived by a Personal Service Business (PSB) is exempt from the personal services regime

Personal services business determination

This is a notice from the ATO stating that the taxpayer is conducting a personal services business

Under s.87-60, a taxpayer can apply for a determination if:
  • they are not sure whether they meet one or more of the personal services business tests, or
  • they don't meet the results test and 80 per cent or more of their personal services income comes from one client, or
  • unusual circumstances prevent the taxpayer from meeting one or more of the tests

Unrelated Clients test

An individual or PSE will meet the unrelated clients test in the income year if: the service provider (individual or PSE) doing the personal services work generates PSI from two or more clients who are not associated with each other or with the service provider

the personal services must also be provided as a direct result of the service provider making offers to the public (e.g. by advertising or word of mouth) – s.87-20

Employment test

Subject to certain exceptions noted below, an individual service provider will meet the employment test in the income year if they:
  • have employees, engage sub-contractors or engage entities that perform at least 20% (by market value) of the principal work, or
  • have apprentices for at least half the income year

Business Premises test

An individual or PSE service provider will meet the business premises test if, at all times in the year of income, the service provider maintains and uses business premises that are:
  • mainly used to conduct the work (more than 50% of the use) from which PSI is gained or produced
  • used exclusively by the service provider

  • physically separate from the private residence of:
    - the individual doing the personal servicces work
    - their associates
    - the service provider’s associates

  • physically separate from the business address of all clients or their associates – s.87-30

If the PSI rules apply

The main effects are:

The PSI, reduced by certain deductions to which the personal services entity is entitled, is treated as the income of the individual who does the personal services work and must be included in their income tax return – s.86-15. This is called attribution

The personal services entity must either:

- pay the PSI promptly, as salary or wages, to the individual who does the personal services work, or

- attribute the net PSI to the individual who does the personal services work and withhold and remit tax on that income