Are you earning Personal Service Income?

Tax time is here, and a question being asked in the tax return is: ‘Are you earning Personal Services Income?’. But what is Personal Services Income? Personal Services Income (or PSI) is when more than 50% of the income you’ve received is a reward for your personal efforts or skills (rather than generating the income by the use of assets, the sale of goods, or from a business structure). You can receive PSI in almost any industry, trade or profession. Common examples include but are not limited to:

• financial professionals
• information technology consultants
• engineers
• construction workers
• medical practitioners.

There are a few things we need to consider when completing a tax return for someone with PSI:

Assessing Your Income

We need to determine if more than 50% of the income you received from a contract is for your personal efforts or skills, if so, it’s likely PSI. Conversely, if the income is mostly derived from the use of assets, selling goods, or engaging other workers, it is generally not considered PSI.

Do the PSI rules apply to your personal services income?

Once it is established that the income is PSI, you need to determine whether the PSI rules apply or not.

If the PSI rules apply, there are limitations on the tax deductions you can claim in your tax return e.g. you can’t claim rent, mortgage interest, or costs of running your home and you can’t pay your spouse or associates for non-principal work.

In addition, if the income is earned through a company, trust or partnership, and the PSI rules apply, the income needs to be directly attributed to your individual tax return and taxed at your marginal tax rates.

The PSI rules won’t apply if you either:

• meet the “Results Test”, OR
• meet ONE of the other three tests AND less than 80% of your PSI income is from the one source

Applying the Results Test

To pass the results test, you need to meet all 3 of the following conditions for at least 75% of the PSI earnt:

• You must be paid to produce a specific result;
• You are required to provide equipment or tools (if required);
• You are required to fix mistakes at your own cost.

Additional PSI Tests

The additional three tests are:

Unrelated Clients Test: You must have received PSI from two or more unrelated clients and there must be a direct connection between the offer to the public and you being engaged to perform the work e.g. through advertising or being listed on a contractor database.

Employment Test: You engage others to do at least 20% of the principal work or you have one or more apprentices that are employed for at least half the income year.

Business Premises Test: You maintain and use a business premises that is physically separate from your home and client’s premises.

There is a lot involved when trying to determine whether or not you are earning PSI, so its always good to reach out to your Accountant if you have any uncertainties. For those with questions or if anyone would like further information on this topic, please contact one of the friendly Accountants at HQB Accountants Auditors Advisors.

– Heida Bell

Posted 27.08.2024

This article is compiled as a helpful guide for your private information and is subject to copyright. We suggest that you do not act solely on the basis of material contained in this article because items are of general nature only and may be liable to misinterpretation in particular circumstances. We recommend that our advice be sought before acting on any of these crucial areas.