Tax Rules For Personal Services Income

What is PSI?

Personal services income (or PSI) is income (whether ordinary income or statutory income) that is earned mainly as a reward for the personal efforts or skills of an individual (ie more than 50% of the income must be a reward for the personal efforts or skills of an individual). PSI includes income from the personal efforts or skills of an individual that is earned through a PSE.

Examples of income that will clearly be PSI include:

• salary or wages;

• income of a professional person practising on their own account without professional assistance;

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

• income derived by consultants, for example, computer consultants or engineers, from the exercise of personal expertise; and

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

PSI earned through a company or trust

If you operate your business through a PSE, income earned by the PSE from the provision of your personal services will be attributed to you for tax purposes unless:

• the PSE is carrying on a personal services business (PSB); or

• the income was promptly paid to you as salary or wages.

The PSE will be carrying on a PSB if at least one of a number of tests (PSB tests) are satisfied. These are:

• the results test (the most important test);

• the unrelated clients test;

• the employment test; and

• the business premises test.

If 80% or more of your PSI (with certain exceptions) is income from one client (or the client and their associate(s)) and the results test is not met, the PSE will need to obtain a PSB determination from the ATO.

Generally speaking, the ATO will only issue a PSB determination if satisfied that, if not for unusual circumstances, one of the PSB tests would have been met or would reasonably have been expected to be met.

Generally speaking, the ATO will only issue a PSB determination if satisfied that, if not for unusual circumstances, one of the PSB tests would have been met

A PSE cannot deduct amounts that relate to gaining or producing your PSI, unless you could have deducted the amount as an individual or the PSE received the PSI in the course of carrying on a PSB.

Even if you don't use a PSE to derive your PSI, there are limitations on the deductions that you may claim against your PSI. For example, you may not be able to deduct certain home office expenses, eg occupancy expenses such as mortgage interest or rent.

New ATO ruling

The ATO recently released a new taxation ruling (TR 2022/3) which considers:

• how to identify PSI;

• how the PSI rules apply to an individual or entity; and

• the application of the PSB tests.

The ruling contains 40 examples of how the PSI rules will apply in particular situations.

Want to find out more?

Talk to us about whether the PSI rules may apply to you.