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Are you receiving personal services income?

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Do you earn personal services income (PSI)? While most people may think that it only applies to builders or tradies, the truth is that may also apply to any instance where individuals work and earn income using their personal effort or skills. This includes professionals working in IT, finance or the medical sector. If you earn PSI during the income year, the deductions that can be claimed will be limited to the deductions that you could have claimed if you were an employee and the income earned was salary and wages. To avoid that outcome, individuals/personal services entities (PSEs) can self-assess whether they conduct a personal services business (PSB).

PSI generally only applies to individuals who receive more than 50% of their ordinary or statutory income from a contract as a reward for their personal effort or skills. An example that most people would be familiar with is a sole trader tradesperson using their skills to earn income, either directly or through an interposed entity (a PSE). However, PSI can apply to any industry, trade or profession where individuals use their personal effort or skills. This includes so-called “white collar” professionals in IT, finance and medicine, in addition to the construction industry and related trades. 

If you earn PSI during the income year, the deductions that can be claimed will be limited to the deductions that you could have claimed if you were an employee (rather than an individual earning PSI) and the income earned was salary and wages. This means that, for example, you would be unable to deduct rent, mortgage, interest, rates or land tax in relation to a residence or part of a residence that you use to gain or produce your PSI. This rule applies to all PSI, regardless of whether it is earned as a sole trader or through a company, partnership or trust. This also largely applies to PSEs in relation to the “test individual”. 

To avoid having the PSI rules apply, individuals and PSEs can self-assess whether or not they conduct a PSB against four tests. If any one of the four tests is met during an income year, the PSI rules will not apply to limit the deductions available to the individual or PSE: 

  • The results test can be satisfied if at least 75% of a test individual’s PSI in an income year is for producing a result as well as being responsible for the cost of rectifying all defects. The individual is also required to supply the plant, equipment and tools of trade needed to do the work. 
  • The unrelated clients test can be met if an individual or a PSE gains or produces income during the year from services for two or more entities that are not associates of each other (or associates of the individual or PSE). The services must be provided as a direct result of making offers/invitations (eg advertising) to the public at large or a section of the public. 
  • The employment test is met where the individual or PSE engages one or more entities to perform at least 20% (by market value) of the individual or PSE’s principal work. Note, however, that test individuals of the PSE do not count towards the employment test. 
  • The business premises test can be satisfied if the individual or PSE maintains and uses business premises at all times during the income year that meet certain conditions, such as being physically separate from premises used for private purposes. 

However, if more than 80% of the PSI or PSE’s income is from one source (ie services to the same entity and/or its associates), then only the results test can be used to self-assess whether a PSB is being conducted. The ATO has also proposed to continue the existing method for estimating net amounts that will be included in an individual assessable income in relation to a PSE. It is important to note that income generated principally from supply or sale of goods, supply and use of income-producing assets, or by specific business structures are not captured under the PSI rules.

Source: Personal services income - do the rules apply to you? 
Personal services income tool 
Taxation Ruiling TR2022/23