Income of a personal services business
PSI earned by a personal services business (PSB) is not income from a business structure.
Even though a PSB may operate in a commercial or business-like way, the income that it earns is still categorised as PSI for income tax purposes, if it is income that is mainly a reward for an individual's personal efforts or skills. Such income is not from a business structure.
The significance of this is PSI (as distinct from income from a business structure) that is received by a company, partnership or trust may be subject to the application of the general anti-avoidance provisions, Part IVA, where the income is split with an associate or retained in a company and taxed at the lower company tax rate.
Joe operates through his private company (Joe Pty Ltd) and installs air conditioning ducts. The income from this activity is mainly a reward for Joe's personal efforts or skills and is therefore personal services income.
Joe Pty Ltd offers services to the public at large and is engaged to install specific duct work in accordance with a set of plans. The contract price is based on installation of the duct work in accordance with those plans, and any changes are subject to the variation clauses in the contract. Joe Pty Ltd provides the plant and equipment for the work and is liable for making good any faulty work. Joe Pty Ltd satisfies the results test because the company is contracted to produce a result, that is, it is paid upon installation of ducts, it provides the tools to do the work, and is liable for rectifying defects.
Joe Pty Ltd is therefore conducting a PSB and is not affected by the PSI rules. However the company still earns PSI and should have regard to the general anti-avoidance provisions.
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If you’re unsure whether you generate income through a business structure, you can seek a private binding ruling from the ATO.
Information on how to decide if income is personal services income (PSI) or income generated by a business structure.