Many consultants and contractors operate as a sole trader or through a company, partnership or trust. In many cases, the income received for the work they do may be classified as personal services income (PSI).
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If you operate through a company, partnership or trust, when we say you or your, we are referring to that business.
If you're an employee only earning salary and wages (that is, working for an employer and not under an Australian business number), you don't need to read any further. This information does not apply to your circumstances.
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To work out if your income is PSI, you first need to work out what percentage of the income you receive from each contract you complete is for:
- labour - that is, the skills, knowledge, expertise or efforts of the person who performed the services
- the materials supplied and/or tools and equipment used to complete the job.
If the majority (more than 50%) of your income is for the skills, knowledge, expertise or efforts of the person who performed the services, this income will be classified as PSI.
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Work done
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What was charged
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Is the income PSI?
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Job 1
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- Fixed blocked toilet
- Repaired several leaking taps
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Total amount of $250:
- $225 labour (90%)
- $25 materials (10%)
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Yes, the $250 is PSI as more than 50% of the income received is for Mark's skills and knowledge
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Job 2
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Installs a bathroom vanity
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Total amount of $800:
- $160 labour (20%)
- $640 materials (80%)
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No, the $800 isn't PSI as 50% or less of the income received is for Mark's skills and knowledge
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No matter what industry or occupation you work in, it's important to look at the income you receive from each contract and work out if it's PSI.
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Income that isn't PSI
Your income isn't PSI if 50% or less of it is for the skills, knowledge, expertise or efforts of the person who performed the services.
The income you generate in the following ways is not PSI:
- By selling or supplying goods. Income from selling or supplying goods, such as retailing, wholesaling or manufacturing, is generally not PSI as the income is not mainly a reward for your skills, knowledge, experience or efforts.
- Using an income-producing asset. Income from an income-producing asset, such as a bulldozer or printing press, is generally not PSI as the majority of the income is generated by the asset.
- Granting a right to use property. Income from granting a right to use property, such as copyright to a computer program, is generally not PSI as the majority of the income is generated from the right to use the property.
- Through a business structure. Income from a business structure, such as a large firm, is generally not PSI as the majority of the income is generated by the significant assets, many employees or contractors, sizable operations or goodwill of the business structure.
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For more information about whether your income is PSI, refer to:
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If your income is PSI
If you receive PSI, then certain rules (known as the PSI rules) may apply that:
- limit the deductions you can claim against this income
- affect your reporting obligations, such as tax returns and pay as you go (PAYG) withholding.
If you operate a company, partnership or trust, you need to treat the PSI as belonging to each individual who performed the services - you can't keep the PSI as part of your business profits.
If your income isn't PSI
If you don't receive PSI, then you do not need to read any further. There are no changes to your tax obligations.
Last Modified: Friday, 17 October 2008