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.
Reason for calculating the PSI:
- The PSI rules are designed to prevent PSI from being diverted or split with other individuals or entities to pay less tax.
- The PSI rules are also designed to limit the diversion of PSI to associated entities through company’s, partnerships, or trusts.
- The PSI rules also restrict the types of deductions that can be claimed against PSI for sole traders and PSEs.
PSI Incomes:
Any income which are earned or derived from
- Personal Skills
- Expertise
- Labour
Non – PSI Incomes:
The below mentioned incomes are not classified as PSI Incomes
- Supply and sale of goods
- Supply and use of income producing assets
- Business structure of the entity
Impact of PSI in Tax:
- PSI affects the tax obligations by having a specific rules and regulations on the deductions based on the business structure and income sources.
- If PSI applies, the regulations will help in the proper allocation of the income to the person and make sure it is not averted to other individuals or entities.
- It allows an individual to claim additional deductions and reduce the tax burden.
- It ensures the compliance of an individual and avoids penalties.
Claimable and non-claimable deductions:
When the PSI rules applies, there are certain deductions which can be claimed or which cannot be claimed.
The claimable deductions include:
- Registration and licensing fees
- Account Keeping fees
- Salaries, Wages or Super contributions
- A portion of home office expenses
The non claimable deductions are as follows:
- Rent, mortgage and taxes
- Super contributions and the payments to associates of non-principal works.
Record Keeping for PSI:
A person needs to keep the records of all the transactions explaining the tax affairs.
They need to keep the record of all transactions of 5 years. The 5 years starts from when a person prepared or obtained the records or completed the transactions.
When an individual is applicable for PSI, they need to keep the records to show:
- The income is PSI or not
- How the PSI is determined
- Expenses apply to PSI received
- Deductions that can be claimed against the PSI
The types of records an individual need to be maintained are as follows:
- Tax invoices
- Timesheets submitted to the client or labour hire firm
- Contracts with schedules
- Emails evidencing contract negotiation
- Bank statement & Receipts
- Vehicle logbooks
Tests to determine the PSI:
There are certain tests and requirements for determining the PSI. They are
- Employment test
- Business Premises test
- Results test
- 80%rule test
We will be discussing in detail about the tests and the claimable/non claimable deductions in the future blog.
Credits
Dhanya Ramesh
Services Management Team
