Companies, partnerships and trusts
When the PSI rules apply there will be:
The PSI rules only apply to income that is PSI. You can still claim expenses against other income and normal tax rules apply. If you receive both PSI and other income then you may need to allocate your expenses between each category of income.
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Deductions your business can't claim against PSI
The deductions your business can't claim against the PSI you received include the following:
Rent, mortgage interest, rates and land tax
You can't deduct rent, mortgage interest, rates and land tax for an individual's (or their associate's) residence, where those expenses relate to that individual's PSI. This also means you cannot deduct these expenses when the business premises are at the individual's home.
Sarah has recently set up a business called Sarah's Financial Services, where Sarah provides financial advice and completes tax-related forms, for example, business activity statements and tax returns. Sarah operates this business from one of the rooms in her house.
All of the income generated is PSI as most of the income relates to Sarah's skills, knowledge and expertise. Sarah has also worked out the PSI rules apply.
Since the PSI rules apply, Sarah cannot claim rent, mortgage interest, rates or land tax relating to her residence against the PSI generated.
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Payments to associates for non-principal work
Your business can't deduct payments made to an associate (for example, spouse, child or other relative, or a related entity) for performing non-principal work for the business.
Principal work is the work required to be done under the contract and generates the PSI.
Non-principal work is incidental or subsidiary work that is not central to meeting the obligations under the contract (that is, not the main work for which the business gets paid). Examples of non-principal work include bookkeeping for the business, issuing invoices, secretarial duties and running the home office.
Payments to associates include:
- remuneration such as a salary or commission
- an allowance
- reimbursing an expense
- interest on a loan.
Rodri provides marketing consultancy services through his company Rodri Co Pty Ltd. Its sole income is Rodri's PSI.
Jenna issues invoices, banking receipts and administers the home office.
However, issuing invoices, banking and administering the home office, is not principal work. Rodri can't deduct the wages paid to Jenna for issuing invoices, banking and administering the home office.
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Super contributions for associates for non-principal work
Your business can't deduct super contributions for an associate (for example, spouse, child or other relative), who does non-principal work such as bookkeeping for the business, issuing invoices, secretarial duties and running the home office.
Wendy is an editor who does editing and proofing work through her company Wendy's Editing Services Pty Ltd. Wendy has little spare time and decides to get her brother, Jack, to do the bookwork and issue invoices for work completed.
Jack's salary is $10,000 a year and Wendy's Editing Services Pty Ltd contributes $900 to a super fund for Jack.
As Jack is an associate (he is Wendy's brother) and he performs non-principal work (bookwork and issuing invoices are not the main work clients pay for), Wendy's Editing Services Pty Ltd cannot claim a deduction for the $900 super contribution.
End of example
However, your business can deduct super contributions for an associate relating to principal work they do. You can only deduct the superannuation guarantee (SG) amount your business has to contribute for the associate. The SG amount is based only on the salary or wages you paid the associate for principal PSI-related work and not non-principal work.
The superannuation guarantee limit does not apply where you operate through a company, partnership or trust and the associate does 20% or more (by market value) of your business' principal work. However, in that situation your business passes the employment test and may not be subject to the PSI rules anyway.
The PSI rules do not affect the deduction of super contributions for:
- work an associate completes where your business earns income other than PSI
The term 'super contributions' in this section refers to contributions you make to a super fund or retirement savings account (RSA). Deductions for super contributions are subject to other tax rules.
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David is an engineer who works through his company David Co Pty Ltd. In the 2008-09 income year most of the income is PSI as it is mainly for David's knowledge, skills and expertise.
The company hires Mary (an associate of David's) to perform principal work. Mary completes 5% of the principal work (by market value) and is paid salary of $5,000. The company contributed $2,500 to a super fund for Mary.
David Co Pty Ltd is not entitled to claim a deduction for the full amount it contributed to the super fund for Mary. The deduction that David Co Pty Ltd is entitled to is capped at the amount it would have had to contribute in order to avoid an individual superannuation guarantee shortfall for Mary. For the 2008-09 income year that amount was $450 (9% of $5,000).
However, if Mary performed 20% or more (by market value) of the principal work, David Co Pty Ltd could claim the entire $2,500 as a deduction.
End of example
Companies and trusts can normally claim all their motor vehicle expenses, although private use of their vehicles is generally subject to fringe benefits tax (FBT).
The PSI rules add a special rule for businesses. If your personal services are contracted through a company, partnership or trust that is subject to the PSI rules, it is only allowed to claim expenses for one car used for private purposes. If your business has more than one car in private use at the same time, you must choose the one to claim deductions for. This choice remains in effect for as long as your business has that car.
A car is a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers, but not including a motorcycle.
General deduction rule
As well as the specific deductions listed above that can't be claimed (or the amount that can be claimed but is limited), there is an additional rule called the general deduction rule. This rule only allows businesses to claim the same deductions that the individual who generated the PSI could have claimed in the same situation.
For your business to be entitled to a deduction under the general deduction rule the expense must:
- be an allowable deduction under tax law
- relate to gaining or producing the individual's PSI.
Deductions your business can claim against PSI
Your business can claim the following deductions against the PSI you received if your business incurred the expenses to generate this income:
- gaining work – for example advertising, tendering and quoting for work
- registration and licensing fees
- insuring against loss of income, earning capacity or liability for acts or omissions in the course of earning income
- meeting obligations under GST
- salary or wages paid to the individuals who performed the services - the principal worker
- salary or wages for an arm's length employee (not an associate)
- reasonable amounts paid to an associate for principal work
- complying with workers' compensation law
- super contributions for the individual or an arms-length employee (not an associate)
- running expenses for a home office - for example, heating and lighting (but not rent, mortgage interest, rates or land taxes)
- depreciation of income-producing assets
- entity maintenance deductions which include
- fees or charges associated with a bank, credit union or other financial institution account (but not including interest or interest-like amounts)
- tax-related expenses (for example, preparing and lodging tax returns and activity statements)
- any expense incurred for preparing or lodging a document under Corporations Law, except where the payment is made to an associate
- statutory fees.
In particular, your business can only claim a deduction for an expense paid or incurred in gaining or producing assessable income. The expense cannot be a capital, domestic or private expense.
This is not a complete list of what your business can claim because what businesses do, and how they do it, varies.
Where the PSI has been generated by more than one individual, the deductions relating to that PSI need to be apportioned between these individuals.
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