PSI:
· Personal Services Income (PSI) is income produced, mainly from your personal skills or efforts as an individual. Only individuals can have PSI. It can be earned directly by a sole trader, or indirectly through an entity known as a Personal Services Entity (PSE).
· Income which are more than 50% of the income received from a contract reward of personal skills or efforts rather than the use of assets, sales of goods or from other business.
· If 50% or less of the income received from a contract was for your personal efforts or skills, then none of the income from that contract is PSI.
Tests to determine the PSI:
There are certain tests and requirements for determining the PSI. They are
1. Employment test
2. Business Premises test
3. Results tests
4. 80%rule test
1. Employment Test:
Employment test considers the nature of the work a person performs, and the circumstance t is performed.
This test helps in categorising the employment status and guides you a person to manage the tax obligations.
2. Business Premises Test:
This test assesses the business premises are distinct from the personal residence.
The business premises should be used exclusively of work, showing a high level of business activity.
Meeting the requirements of the business test allows a person to have more freedom in tax management.
3. Results Test:
This test assesses the outcomes of an individual activity rather than the activities.
The result test involves the following questions:
· Whether payment is only due after the contracted result has been achieved
· If it is incumbent upon you to provide the tools and equipment necessary to complete the work
· Whether you are responsible for the costs of any flaws and are obligated to rectify any errors or flaws.
4. 80% Rule:
The 80% Rule states that if 80% or more of PSI comes from the same client, PSI rules apply.
This rule is crucial in determining whether your income is subject to PSI rules, and being aware of this rule and its consequences when assessing your income sources is important for tax compliance and determining how PSI rules apply to your specific situation.
Claimable & Non – Claimable deductions:
PSI rules often limit the types of deductions that can be claimed against PSI income, depending on the business structure and specific contracts.
The rules surrounding these deductions depend heavily on whether over 50% of your income comes from your personal labour or skills.
Non – Claimable Deductions:
When over 50% of your income is derived from your personal skills or efforts, there are certain limitations on the deductions you can claim. Restricted deductions include:
· Rent, mortgage interest, rates, or land tax for your home office
· Certain travel and entertainment expenses
· Capital expenses (large costs that improve the value of your asset)
Claimable Deductions:
PSI earners can claim deductions for expenses directly connected to their PSI income like:
· Advertising and marketing costs
· Business-related travel (excluding certain restricted travel expenses) Professional fees, and necessary business subscriptions.
ATO PSI Determination Tool:
The ATO’s PSI Decision Tool is a valuable resource for determining if you have earned Personal Services Income (PSI) and how it affects your tax obligations. The tool is designed to assist individuals in ascertaining whether the PSI rules are applicable to them or not.
Basic steps to use the tool include entering relevant details about your income and answering a series of questions to help determine your PSI status.
Benefits of using ATO Tool:
· Allows for a quick and straightforward determination if your income falls under PSI rules.
· Offers valuable insights into the implications of your tax obligations.
· Helps you make informed decisions about your business operations.
· Ensures compliance with tax regulations.
Credits
Dhanya Ramesh
Services Management Team
