What is Personal Service Income (PSI) and what are its disadvantages?
According to the Australian Taxation Office, PSI is money earned as a result of personal skills or efforts, and usually applies to contractors or consultants.
For a start, you can check out the personal services income tests to find out how they apply to you. The tests are:
- Results Test
- The 80% Rule
- Unrelated Clients Test
- The Employment Test
- Business Premises Test
The Results Tests
This entails you getting paid per a contract or arrangement when you complete a particular work. You don’t pass the first results test if you get paid on an hourly or daily rate because you are not paid after you finish the work. You are getting paid a rate based on the time you spent on the work, rather than on your skills that are required to accomplish the work.
The 80% Rule
This is the case where you earn 80% or more of your personal services income from a single client (the entire income year), so you can’t determine if you pass the other tests. You have to go to the Australian Taxation Office to obtain a personal services business determination. Doing this is a must, or you forfeit the PSI.
Unrelated Clients Test
This involves you providing a service to client/s after you have made an offer to the public for your services.
The Employment Test
You have to answer a set of questions to find out if you meet the requirements of this test.
Business Premises Test
Like the employment test, you have to answer a series of questions to know if you pass this test. You have to answer “yes” to all questions in order to pass the Business Premises Test. Some examples of these questions include:
- Did you own or lease your business premises throughout the income year?
- Are your business premises utilised for personal services work over 50% of the entire income year?
- Are your business premises located apart from your residence or the residences of your associates?
After you have determined which personal services income test is applicable to you, start working to move out of the personal services income regime. Take note that if your business is set up as a company or trust, the personal services income made by your business will significantly impact your capability to carry out tax planning strategies.
Because taxation is complicated, investing in good accounting services is highly recommended. PJS Accountants offers expertise in steering your business in the right direction and answering your questions about Personal Services Income and how your tax affairs can be impacted by it. We collaborate with our clients to ensure we give only the best and quality accounting services, including assisting clients with enquiries about Personal Services income.
For more information contact PJS Accountants and talk to one of our team members about how to go about moving your business away from earning personal income services to generating business income. This move allows you to expand your business by taking on more clients and spending more resources on hiring other people to do principle tasks, thus letting you capitalise on other people’s work and prepare to take on business risks.