DO YOU EARN PERSONAL SERVICES INCOME?
This is an important question for many contractors, because if the answer is “Yes”, the contractor can be limited in what deductions they are able to claim and who pays the tax on their net income.
Personal Services Income (PSI) is defined as income that is mainly a reward for your personal efforts or skills. Income can be PSI whether it is for doing work or for producing a result.
Some examples of income which is considered income from personal services, are:
• Salary or wages;
• The income of a professional person (eg doctor, lawyer, accountant) practising on their own without professional assistance;
• Income payable under a contract which is wholly or principally for the labour or services of a person;
• The income derived by a professional sports person or entertainer from the exercise of their professional skills; and
• Income derived by consultants (e.g. computer consultants or engineers).
The term “mainly” refers to “chiefly, principally or primarily”. The ATO considers the word “mainly” implies that more than half of the relevant amount of the ordinary or statutory income is a reward for the personal efforts or skills of an individual.
The following income is specifically excluded as PSI:
• Income derived mainly from the supply or sale of goods;
• Income derived mainly from the supply and use of income-producing assets;
• Income derived mainly from a business structure; and
• Income derived mainly for the granting of a right to use property.
Where there are multiple obligations, that is, the supply of goods and services, they must be considered as a whole to decide whether income is mainly a reward for the personal efforts and skills of an individual. A good example is the sale and installation of plant or equipment; if more than half of the income is derived from the sale of the item, the whole income will not be PSI.
However, if an individual derives income from say, plumbing activities, but also from the sale of drain cleaners and plungers, the activities are not related and each source of income must be separately considered.
To determine whether your income is PSI, a comparison of the source of the income is required. You also have to determine whether the value of the efforts and skills of an individual exceeded the value of the other inputs, such as the efforts of other workers, the use of plant and equipment or of intellectual property or goodwill.
If you would like to discuss PSI or want to check whether your income is PSI, please contact the office.