Personal Services Income Tax

After many years of relying (unsuccessfully) on the general anti-avoidance tax provisions contained within Part IVA of the tax Act, the Government introduced legislation that attempted to prescribe the circumstances it considers appropriate for retaining company profits and or income splitting. The rules are generally referred to Personal Services Income (PSI) ATO tax law.

The Personal Services Income (PSI) Tax ATO rules layout various eligibility requirements and tests to determine if an entity is allowed to (a) treat the profits and income as genuine business profits and retain or split them or (b) payout profits (attributed psi) to the individuals that derived the personal services income (PSI).

The personal services income (PSI) tax ATO regulations are generally aimed at circumstances where the income is recorded and received by an entity other than the individual that performed the work. So whilst the personal services income tax regulations do still apply to individuals as sole proprietor businesses, they have far less effect (just reducing the pool of available deductions).

The personal services income tax (PSI) tax ATO rules have a far greater effect on company tax returns and trust tax returns (and also partnership tax returns). If a company tax return or trust tax return contains net personal services income (PSI) because the entity failed the PSI tests, then some or all of the net PSI will need to be “attributed” to the tax return of the individuals that earned the income. The attributed PSI is then included in the individual tax return.

There is a special accounting and tax process that needs to be applied in a company tax return or trust tax return to attribute net personal services income (net PSI) to the respective individual. This process needs to be reported correctly in the company tax return and financial statements. There are also additional PAYG withholding responsibilities on the company or trust and additional forms for disclosing any net PSI attributed.

It’s worth keeping in mind that even if an entity passes the personal services income (PSI) tax ATO rules, the tax commissioner still retains power under the old approach to apply Part IVA anti-avoidance provisions to personal exertion income accounted for in say a company or trust. Otherwise this income would be listed as taxable income in a company tax return or trust tax return and retained or split accordingly.

So it’s not safe to assume that the personal services income (PSI) tax ATO rules are the only method the ATO has of controlling forms of income splitting or diversion.

Personal Services Income (PSI) Tax issues are particularly relevant to consultants and contractors where there is a significant amount of personal labour or skill required for the particular job.

The following income indicates the presence of PSI

Income from your labour, skills, knowledge, expertise or efforts. If more than 50% of the contract was for this type of income then all income from that contract is personal services income (PSI).

The following are not considered PSI

Income that is mainly from supplying or selling goods (retailing, wholesaling, manufacturing) is not personal services income (PSI)
Income from granting the use of intellectual property is not personal services income (PSI)
Income generated by using an income producing asset is not personal services income (PSI)
Income generated by a business structure with substantial assets or employees is not personal services income (PSI)

There are various exclusions that may mean that the PSI rules do not apply to your income. The first is the results test which considers if a number of sub elements.