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 you can't claim against PSI
The deductions you can't claim against the PSI you received when the PSI rules apply, include the following:
Rent, mortgage interest, rates and land tax
You can't deduct rent, mortgage interest, rates and land tax for your (or your associate's) residence, where those expenses relate to your PSI. This also means you cannot deduct these expenses when your business premises are at your 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 produced.
End of example
Payments to associates for non-principal work
You can't deduct payments you make to an associate (for example, spouse, child or other relative) for performing non-principal work.
Principal work is the work that must be done under the contract and generates your 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 you get paid). Examples of non-principal work include bookkeeping for your business, 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
- interest on a loan.
Rodri provides marketing consultancy services which generates PSI. Rodri employs his wife Jenna to assist the business. Jenna issues invoices, banking receipts and administers the home office.
Rodri can't deduct the wages he paid 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
You can't deduct super contributions for an associate (for example, spouse, child or other relative), who does non-principal work such as bookkeeping, issuing invoices, secretarial duties and running the home office
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 completed.
Jack's salary is $10,000 a year and Wendy 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 cannot claim a deduction for the $900 super contribution.
End of example
However, you can deduct super contributions for an associate, relating to principal work they do from which your business receives PSI. You can only deduct the superannuation guarantee (SG) amount you have 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 SG limit does not apply where an associate does 20% or more (by market value) of your principal work. However, in that situation you pass 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 the work an associate completes where you get income other than PSI.
The term 'super contributions' in this section refers to contributions you make to a superannuation 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 produces PSI as most of the income is for David's knowledge, skills and expertise.
David hires Mary (an associate of David's) to perform principal work. Mary completed 5% of the principal work (by market value) and was paid salary of $5,000. The company contributed $2,500 to a super fund for Mary.
David is not entitled to claim a deduction for the full amount he contributed to the super fund for Mary. The deduction that David is entitled to is capped at the amount he would have had to contribute in order to avoid an individual superannuation guarantee shortfall for Mary.
However, if Mary performed 20% or more (by market value) of the principal work, David could claim the entire $2,500 as a deduction.
End of example
Deductions you can claim against PSI
You can claim the following deductions against the PSI you received if you 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
- public liability and professional indemnity insurance
- 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, including premiums for workers compensation
- super contributions for the benefit of the individual or an arm's 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
- bank and other account keeping fees and charges
- tax-related expenses, such as the cost of preparing and lodging tax returns or activity statements.
This is not a complete list of what you can claim because what contractors do, and how they do it varies.