The Australian government enacted personal service income (PSI) to deter taxpayers from splitting income for tax avoidance purposes. PSI itself is defined as an income produced from personal skills or effort as an individual regardless of business structure, such as consultants and contractors who operate their business through a company, partnership or trust.
To know if your business is receiving PSI, you need to take a look at the income from each contract you complete and work out what percentage of the payment is for.
- Case #1 – If you work for more than 50 percent of your income and the income you received is for skills, knowledge, expertise or efforts of individuals who performed the services, the income for that contract is under PSI.
- Case #2 – If you work for 50 percent or less of your income and the income received is for skills, knowledge, expertise or efforts of individuals who performed the services, the income for that contract is NOT PSI.
- Case #3 – Your business income can be a mixture of PSI and other income, so it is important to look at the income you received from each separate contract to work out whether it is PSI.
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Income that is PSI
As a worker, you can receive PSI by performing services in any industry or occupation, such as follows:
- of a professional practising on their own account without assistance. For example, a medical practitioner in a sole practise.
- payable under a contract where the labour or services of a person make up more than 50 percent of the value. For example, contractors in the building, IT and transport industry
- of a professional sportsperson or entertainer from the exercise of their professional skills (this does not include income from endorsements)
- of consultants, for example, computer consultants or engineers from the exercise of personal expertise n of a commission agent who contracts with a supplier to sell goods on their behalf.
Income that is NOT PSI
Income that is not PSI comes from 50 percent of less of the income for skills, knowledge, expertise or efforts of individuals, which categorised as follows:
- Income from the sale or supply of goods, such as retailing, wholesaling or manufacturing, is generally not PSI as the majority of the income is for the sale or supply of finished goods.
- Income generated by an income-producing asset. If your business’ income is mainly generated by income-producing assets, such as a bulldozer or printing press, rather than the skills, knowledge, expertise or efforts of the individuals who performed the services.
- Income from granting a right to use property, such as copyright to a computer program or book, is generally not PSI as the majority of the income is generated from the right to use the property.
- Income generated by a business structure, such as a large national professional firm, is generally not PSI as most of the income is generated by the significant assets, many employees or contractors, sizable operations or goodwill of the business structure; not the skills, knowledge, expertise or efforts of the individuals who performed the services.
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