80% rule - this rule looks at whether you receive 80% or more of your PSI from one client (and their associates). Do not look at the 80% rule unless you do not pass the results test. You use it to work out whether you can use the other tests. This rule may also be called the '80% threshold rule'.
Alienation of personal services income - see PSI rules.
Arm's length - people who are not connected and therefore cannot influence or control each other are said to be at arm's length. The term does not apply to transactions between associates.
Associate -is broadly defined and includes:
- your relatives (see relative)
- if you are in a partnership, the partnership, your partners and their spouses and children
- the trustee of a trust under which you or an associate benefit
- a company under your control or that of an associate
- for a company, also the individual or associate controlling the company
- for a trustee, also a beneficiary or their associate.
Attributed personal services income - when the PSI rules apply, the business must attribute (treat as belonging) the income to the individuals who performed the services. Attributed personal services income is the net amount of income that has been treated as belonging to these individuals.
Business - this term has a broad meaning in income tax law, but in this guide it means a company, partnership or trust. See also personal services entity.
Business premises test - this test looks at where your business premises are and how you use them and is used to work out if the PSI rules apply.
Determination - see personal services business determination.
Employment test - this test looks at whether others were employed or contracted to help with completing principal work and is used to work out if the PSI rules apply.
Entity maintenance deductions - include:
- bank and other account keeping fees and charges (not interest)
- tax-related expenses (for example, preparing and lodging tax returns)
- expenses relating to the Corporations Act documents - for example, ASIC fees
- statutory fees
- registration and licensing fees.
General anti-avoidance law - is general legislation in Part IVA of the Income Tax Assessment Act 1936 that applies to any scheme or arrangement whose main purpose is to obtain a tax benefit. We can issue a tax assessment that cancels the tax benefit.
Net personal services income - is the personal services income amount remaining after subtracting from the gross personal services income:
- non-assessable components (for example, GST)
- salary and wages promptly paid to the individual
- allowable deductions
- entity maintenance deductions.
Net personal services income loss - this is the excess of personal services deductions over personal services income. When the PSI rules apply, this net personal services income loss needs to be allocated to the individuals who performed the services. It cannot be used by the business.
Not a personal services business - see PSI rules apply.
Pay as you go (PAYG) - is a comprehensive system for collecting income tax and other liabilities. Under PAYG, employers remit tax withheld from employees' wages, and personal services entities remit withholding tax on attributed personal services income when they lodge their activity statement.
PAYG payment period is:
- each quarter for small withholders, or
- each month for medium and large withholders.
Personal services business (PSB) - see PSI rules don't apply.
Personal services business determination - this is a notice from us stating the PSI rules don't apply.
Personal services business tests - see the tests.
Personal services entity - is a company, partnership or trust whose income includes the personal services income of one or more individuals. When we mean 'personal services entity' we generally say 'business'.
Personal services income (PSI) - is income that is mainly (more than 50%) a reward for the skills, knowledge, expertise or efforts of the individuals who performed the services.
Principal work - means the main work that generates the personal services income. It is the work that you must perform under contract and that you are paid for. It does not include support work. For example, principal work does not include bookkeeping, banking or secretarial duties, unless that is the main work that you do for customers.
PSI rules - are Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997) that specifically looks at the taxation of PSI.
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'PSI rules' in earlier publications were referred to as 'PSI law', 'PSI legislation', 'PSI measures' or 'Alienation of PSI'. All terms have the same meaning.
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PSI rules apply - this occurs when you receive PSI and you:
- have not passed any of the tests, and
- do not have a determination from us.
If you are a sole trader this means you:
- won't be able to claim certain deductions against your PSI
- need to meet certain tax return obligations.
If you are a company, partnership or trust this means you:
- won't be able to claim certain deductions against the PSI
- need to meet certain tax return obligations
- need to attribute (treat as belonging) the income to the individuals who performed the services (that is, you can't retain the profits within the business)
- may have additional PAYG withholding obligations.
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In earlier publications we said 'not a personal services business' or 'not a PSB' for 'PSI rules apply'. All terms have the same meaning.
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PSI rules don't apply - this occurs when you receive PSI and you pass one of the tests (or have a determination from us). Whether you are a sole trader, company, partnership or trust, this means that the only change in your tax obligations is you will have certain tax return obligations for the PSI you received.
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In earlier publications we said 'personal services business' or 'PSB' for 'PSI rules don't apply'. All terms have the same meaning.
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Relative - this means:
- your spouse (see spouse)
- your (or your spouse's) parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child
- the spouse of one of these people.
Results test - this test looks at whether you receive payment on achieving a specific contracted result or outcome. You use it to work out whether the PSI rules apply.
Salary or wages promptly paid - means paying an amount before the end of the 14th day after the PAYG payment period when the PSI was generated. For example, if your business lodges activity statements quarterly and you generated PSI in the January to March quarter, salary or wages promptly paid would be the salary or wages that your business paid by 14 April to the individuals who performed the services (that is, 14 days after the end of the quarter, 31 March).
Spouse - includes another person (whether of the same or opposite sex) who:
- you were in a relationship with that was registered under a prescribed state or territory law
- although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.
The tests - include:
- results test
- unrelated clients test
- employment test
- business premises test.
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'The tests' in earlier publications were referred to as the 'personal services business tests' or 'PSB tests'. All terms have the same meaning.
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Unrelated clients test - this test looks at whether the income you received is from two or more clients who are not connected or related. You use it to work out whether the PSI rules apply.
You/your - where personal services income is paid to a company, partnership or trust, the words 'you' and 'your' refer to this business. Otherwise the words 'you' or 'your' refer to you personally.
Last Modified: Thursday, 12 August 2010