Personal services income - avoiding common mistakes

Working out if the PSI rules apply

If you receive PSI, there is a series of tests you must use to work out if the PSI rules apply to this income. These are the:

• results test
• unrelated clients test
• employment test
• business premises test.

Results test

Common mistake: Deciding you have met the first condition of the results test when you are paid on an hourly basis or daily rate

To meet the first condition of the results test, the income you receive under a contract or arrangement must be paid to you for achieving a specified result or outcome. This means you must be:

• engaged to complete a specified job
• paid on completion of that job.

If you are paid on an hourly basis or a daily rate for the services you provide, it is not likely you will meet the first condition of the results test. This is because these payments are not generally linked to producing a specific result or outcome.

Example

A government department contracts Consultant Co to develop a product for their IT system. The department provides the specifications for the product.

The contract specifies a daily rate of payment to Consultant Co for developing the product. It also specifies that payment will be made on a weekly basis.

This contract does not meet the first condition of the results test as payments are for work done during the week and not for completing a specified result.

For more information about other conditions of the results test, refer to Personal services income - companies, partnerships and trusts.

The 80% rule

Common mistake: Not obtaining a personal services business determination (or applying the PSI rules) when you do not meet the results test and 80% or more of an individual's PSI comes from one client

When using the four tests to work out if the PSI rules apply to your income, you would usually use the results test first.

If 80% or more of an individual's PSI in the income year is from one client (and their associates), you cannot decide for yourself if you meet the other tests. You must obtain a personal services business determination from us or the PSI rules will apply.

To apply for a determination, refer to Personal services business determination application (NAT 72465).

Unrelated clients test

Common mistake: Deciding you have met the unrelated clients test when the services you provide are not a direct result of making offers to the public

Under the unrelated clients test, your services must be provided as a direct result of making offers to the public. This means for each contract or agreement for services there must be an identifiable and definite connection between your offer and being engaged to provide those services.

Making offers to the public can include:

• advertising in a newspaper, magazine, or business directory
• maintaining a website.

If you operate through a labour hire firm or you register with an agency, you are not offering your services to the public under the unrelated clients test.

Example

Raji operates a computer programming company and she has two major clients. One of the clients provides 65% of her company's income (the programmer's PSI) and the other client provides the balance. Raji's company obtained both contracts with her clients through a labour hire firm.

As the contracts were obtained via a labour hire firm, these clients cannot be counted for the purposes of the unrelated clients test.

If Raji's company had obtained her clients as a direct result of advertising to the public (not through a labour hire firm) and the clients are not associates of each other, and are not associates of Raji or of the personal services entity, this part of the unrelated clients test would have been passed.

For more information about the unrelated clients test, refer to Personal services income - companies, partnerships and trusts.

Applying the tests

Common mistake: Applying the tests to the entire company, partnership, or trust and not to each individual

If more than one consultant or contractor generates PSI for the company, partnership or trust, you cannot apply the tests to the whole business. You must apply the tests to each consultant or contractor.

This means you must keep separate income and expenses records for each consultant or contractor.

Example

Two management consultants operate through a company. They provide services to the public under separate contracts. Neither consultant works on the other consultant's contracts.

As each consultant is providing exclusive services under separate contracts, the tests must be applied separately to each consultant.

If one consultant meets the results test, this does not mean the other consultant automatically meets it. The other consultant must meet a test or hold a personal services business determination from us. If they do not, the PSI rules will apply to their PSI.