It depends – Do PSI rules apply? – Income tax

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In this edition of ‘It Depends’, graduate Declan Cawley talks about the PSI rules: what they are, who they apply to, and the things you need to consider.

VIDEO TRANSCRIPTION

Welcome to this episode of It Depends. Today we are going to talk about income from personal services.

What is Personal Services Income?

Personal service income is defined as income that is primarily a reward for your personal effort and skill. Therefore, if your income is derived primarily from the supply of materials or the supply and use of income-generating assets, it will not be PSI. The use of the word “mainly” is crucial here and it means that you will need to check if more than 50% of your income comes from the provision of your personal efforts and skills.

What do the personal services income rules do?

The PSI rules ensure that all PSIs receive the same tax treatment. They do this by ensuring that any PSI you earn is included in your taxable income rather than an entity’s taxable income. This means that you cannot direct your PSI payment to an entity and thereby obtain a tax benefit.

Do the PSI rules apply to my personal services income?

It depends. PSI rules will not apply if one, the entity that receives your PSI pays it to you promptly in the form of salary and wages. Second, the entity’s income actually comes from its business structure. Or three, the entity is engaged in personal service activities. In today’s episode we will consider when an entity will conduct a personal services business and in a future episode we will consider when an entity’s income comes from its business structure.

Does my entity operate a personal services business?

An entity will carry on a personal services business if it meets one of the four personal services business assessment criteria. The four tests of personal service businesses are the earnings test, the unrelated clients test, the employment test, and the business premises test. The last three personal services business criteria can only be considered if none of the individuals whose PSI is included in the entity’s income derives more than 80% of their income from a single entity or his associates.

What else should I consider?

If an entity is not subject to the ISP rules because it is carrying on a personal services business, it will still need to determine whether the distribution of its income in a particular manner will be subject to the anti-avoidance provisions. The commissioner has a series of public decisions dealing with this issue. In a later episode, I will discuss these rulings and the PCG 2021/4 guidelines and describe how the PSI rules interact with the anti-avoidance provisions.

If you have any questions about PSI, please contact a member of the tax team.

© Cooper Grace Ward Lawyers

Cooper Grace Ward is a leading Australian law firm based in Brisbane.

This publication is for informational purposes only and does not constitute legal advice. You should seek advice specific to your situation and do not rely on this publication as legal advice. If you would like us to advise you on matters arising from this publication, please contact Cooper Grace Ward Lawyers.

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