Personal services income (PSI) is income produced mainly from your skills or efforts as an individual, where that skill or effort represents more than 50% of what you earn.
What is PSI?
Income is classified as PSI when more than 50% of the income you’ve received from a contract is a reward for your personal efforts or skills, rather than being generated by the use of assets, the sale of goods, or from a business structure.
When working out if your income is PSI, you need to look at the income you have received from each contract separately.
The terms and conditions of the contract, as well as invoices and written agreements that detail the work arrangement, are important in working out if the income is PSI. These can help you to work out what percentage of income from each contract was for:
- your labour, skills, knowledge, expertise or efforts, and
- anything else, such as the materials supplied, or tools and equipment used.
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.
Who can earn PSI?
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.
As PSI is mainly a reward for an individual’s personal efforts or skills, only individuals can earn PSI. Individuals can earn PSI either directly as a sole trader, or through another entity such as a company, partnership or trust. When an individual earns PSI indirectly through another entity, that entity is referred to as a ‘personal services entity’ (PSE).
Work out if the PSI rules apply to you
If you have worked out that the income you have received is PSI, the next step is to work out whether the PSI rules apply to you.
To do this, you need to work out if you are a personal services business (PSB) in the year that you received PSI.
You can self-assess as a PSB if you:
- meet the results test in relation to at least 75% of your PSI, or
- meet one of the other PSB tests and less than 80% of your PSI is from the same entity and its associates.
The other PSB tests are Unrelated clients test, the Employment test, and the Business premises test.
The test conditions are as follows:
Results test
If you pass the results test, your business is a PSB for that income year. The PSI rules don’t apply to the income you earn from this PSB.
To pass the results test, you need to meet all 3 of the following conditions for at least 75% of your PSI you 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.
You may find that some of your business contracts meet the 3 conditions of the test, and some don’t.
Unrelated clients test
If you self-assess as a PSB, the PSI rules will not apply to the PSI you earnt in that income year.
You must also meet the 80% rule to self-assess using the unrelated client’s test.
To pass the unrelated clients test in an income year, you must meet both of the following conditions:
- You must have received PSI from 2 or more unrelated clients.
- There must be a direct connection between the offer to the public and you being engaged to perform the work.
If you operate through a company, partnership, or trust and you have more than one individual generating PSI, you’ll need to work out whether you pass the unrelated clients test for each individual separately. It is possible to have different outcomes for different individuals.
Employment Test
If you self-assess as a PSB, the PSI rules will not apply to the PSI you earnt in that income year.
You must also meet the 80% rule to self-assess using the employment test.
To pass the employment test, your business must employ or contract others to help perform work that generates your PSI, and you must meet one of the following conditions:
- at least 20% of the principal work is performed by others
- one or more apprentices are employed for at least 6 months of the income year.
If you operate through a company, partnership or trust and you have more than one individual generating PSI, you will need to work out whether you pass the employment test for each individual. It is possible to have different outcomes for different individuals.
Business premises Test
If you self-assess as a PSB, the PSI rules will not apply to the PSI you earnt in that income year.
You must also meet the 80% rule to self-assess using the business premises test.
You will pass the business premises test if at all times in the income year you maintained and used a business premises which meets all of the following conditions:
- used mainly to gain or produce PSI
- used exclusively by you
- physically separate from your private premises
- physically separate from your clients’ premises
If you operate through a company, partnership or trust, and the company, partnership or trust has more than one individual generating PSI, then the company, partnership or trust must work out whether they pass the business premises test for each individual separately. It is possible for one individual to conduct a PSB but not another.
The PSI rules will not affect:
- the contractual relationships between you and your clients or customers – for example, you do not become an employee or stop being a contractor
- your entitlement to an Australian business number (ABN) or registration for goods and services tax (GST)
- whether you are still considered to be running a business.
If you are still unsure, contact us and we can discuss whether you are operating a PSB or not.
