Personal Services Income (PSI) is ordinary or statutory income that has resulted from an individual’s personal efforts and skills; income that is intended as a reward. It is a way to combine company and trust structures to transfer income from one person to lower tax rate entities or family members. Deciding whether your income is PSI involves inspecting each of your contracts or invoices, weighing up what percentage of the income was received for labour, skills or expertise, and looking at which salary and wages as an employee are not affected by the PSI rule.
Personal Services Income (PSI) can appear complicated but it’s a matter of breaking down your income and clarifying how much you earned for what type of work. Ensuring you get the most out of your hard work and follow the rules of PSI is important to the team at Curve Accountants. Read on to understand more about Personal Service Income and how it affects you.
What Is PSI?
The ATO states that PSI is when more than 50% of your income is earned for your efforts or personal skills. If this is true of your income, then all income received is PSI. If this is not the case, then none of the income is PSI.
Once your income is classified as PSI, it must be determined whether income is for an individual or if the individual is actually operating a business. This is because businesses can have both PSI and non-PSI income. Subsequently, it is not always a concept spread across a business.
To have your income classed as Personal Service Income, it must be:
- Generated by personal effort and skills
- Must not be generated by product sales
- Must not be generated by the operation of certain equipment
How Does PSI Affect Me?
You do not earn PSI if your income comes from the sale or supply of finished goods, whether you made them or not, from an asset that produces income, or from licencing your intellectual property. PSI is receivable even if you’re not a sole trader. In this case, when PSI is produced through a company, trust or partnership, the income will be treated as your individual income for tax purposes.
Some common industries, trades or professions that PSI can be earned in are engineers, medical and financial professionals, information technology consultants and construction workers.
If you receive only salary and wages as an employee or certain other types of income, your income will not be affected by the 50% based PSI rule. However, when operating through an entity such as a partnership or trust as an employee of that entity, the PSI rules may apply.
When the PSI rule does not apply to your income, your business is a personal services business (PSB). There are no alterations to your tax obligations here.
Rules surrounding PSI ensure people do not divert income from personal services to reduce or defer their income tax through companies, trusts or partnerships. This improves the integrity and equity of the tax system. At Curve Accountants, we will support you when determining whether your income is PSI. We are experienced in dealing with PSI and can examine your income for you and assist you in reporting PSI correctly and claiming appropriate deductions.
Understanding Personal Service Income
Knowing what Personal Service Income is and how it affects you is important to ensure you are claiming the correct income as PSI. Businesses also must understand PSI to ensure tax return obligations and Pay As You Go (PAYG) withholding obligations are performed legally.
The accountants at Curve Accountants are trained and experienced in Personal Service Income and will provide you with support to ensure your income is organised effectively and correctly. Make an appointment to discuss with us how we can help you.