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  • Deductions that can't be claimed against PSI

    When the PSI rules apply, you cannot claim deductions against the PSI for:

    Rent, mortgage interest, rates and land tax

    Deductions cannot be claimed for rent, mortgage interest, rates and land tax for a residence, where those expenses relate to a person's PSI.

    Example: Deductions not claimable under PSI rules

    Sarah has recently set up a business called Sarah's Financial Services, where Sarah provides financial advice and completes tax-related forms including 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 that 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 produced.

    End of example

    Payments to associates for non-principal work

    Payments made to an associate (for example, spouse, child or other relative) cannot be claimed as a deduction for performing non-principal work.

    Principal work is the work a business must perform under a contract to receive payment.

    Non-principal work is incidental or support work that is not central to meeting obligations under a contract. Examples include bookkeeping, issuing invoices, secretarial duties and running the home office.

    Payments to associates include:

    • remuneration such as a salary or commission
    • an allowance
    • reimbursement of an expense
    • rent
    • interest on a loan.

    Example: Non-principal work

    Rodri provides marketing consultancy services which generates PSI. Rodri employs his wife Jenna to assist in the business. Jenna issues invoices, banking receipts and administers the home office.

    Rodri can't deduct the wages he pays to Jenna as issuing invoices, banking and administering the home office is not principal work.

    End of example

    Super contributions for associates for non-principal work

    Super contributions for an associate (for example, spouse, child or other relative) cannot be deducted if the associate does non-principal work such as bookkeeping, issuing invoices, secretarial duties and running the home office.

    However, super contributions for an associate can be deducted if the associate does principal work which contributes to the PSI. Deductions are allowed up to the minimum percentage that you would have to contribute to meet superannuation guarantee (SG) requirements for that associate.

    You can contribute more than the SG minimum percentage if, in engaging an associate, you pass the employment test, as you will be a PSB and the PSI rules won't apply.

    If an associate completes work that generates income that is not PSI, deductions for super contributions for that work are not affected by the PSI rules. The PSI rules also don't affect deductions for super contributions that are made for yourself.

    The term 'super contributions' refers to contributions you make to a super fund or retirement savings account (RSA). Deductions for super contributions are subject to other tax rules.

    Example: Paying an associate super for non-principal work

    Wendy is an editor who does editing and proofing work. Wendy has little spare time and decides to get her brother, Jack, to do the bookwork and issue invoices for work she completes.

    Jack's salary is $10,000 a year and Wendy contributes $950 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 cannot claim a deduction for the $950 super contribution (or for Jack's salary).

    Example: Paying an associate super for principal work

    David is an engineer who produces PSI. Most of David's income is for his knowledge, skills and expertise.

    David hires Mary (an associate of David's) to perform principal work. Mary completes 5% of the principal work (by market value) and is paid a salary of $5,000. David contributes $2,500 to a super fund for Mary.

    David is not entitled to claim a deduction for the full amount he contributes to the super fund for Mary. The deduction he is entitled to is capped at the amount he would have had to contribute in order to avoid an individual SG shortfall for Mary. This is the super guarantee percentage of her total salary payments. In this case, in the 2019–20 income year, the allowable deduction is:

    • 9.5 % super guarantee × $5,000 = $475

    However, if by employing Mary, David meets the employment test and is a PSB. David can claim the entire $2,500 as a deduction.

    End of example
      Last modified: 30 Jun 2021QC 46085