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Video transcript - Information for contractors and consultants - PSI
If you’re a contractor or consultant and you earn personal services income, special tax rules may affect what amounts you include in your assessable income and what deductions you can claim. Personal services income rules can apply to sole traders, partnerships, companies or trusts. But only individuals can have personal services income. If the income you earn in a contract is more than 50% for your effort or skill in that contract, then you classify this income as personal services income. Your income can be a mixture of personal services income and other income. So you’ll need to work out whether more than 50% of the income you earn is for your effort or skill for each contract.
Take Jason for example. He’s in the landscaping business. It’s his personal effort or skill in each contract that is generating the income; it is not the sale of a product or the operation of certain equipment that generates the income. So Jason’s income is personal services income. Jason will need to apply some tests to see whether the personal services income rules will affect him.
The first test we need to look at is known as the ‘Results test’. You’ll satisfy this test if you can answer yes to each of these questions in relation to at least 75% of your personal services income. Under your contract or arrangement, will you only receive payment when the work has been completed, that is, after producing the contracted result? Do you need to provide the equipment or tools necessary to do the work? Do you have to rectify or are you liable for the cost of rectifying the defects in the work?
The Results test simply looks at whether the engagement of your services and the payment due is dependent on a certain result being achieved.
So, I win a contract for a job, it is a fixed price for a fixed outcome. This satisfies the results test, I don’t get paid until the job is complete. But if I was engaged on a daily or hourly rate and wasn’t dependent on achieving a certain result to receive my income, this would not satisfy the results test, is that right?
That’s right. If your personal services income does not satisfy the Results test, the next step is to apply the 80% rule . Generally the rule is if 80% or more of your personal services income comes from the same client (or the client and one of their associates), the personal services income rules will apply to you. You should seek advice if you’re not sure or you can apply to the ATO for a determination. If you find that each of your clients provided less than 80% of your personal services income your next step is to work out if you pass at least one of three tests. These tests are the unrelated clients test, the employment test and the business premises test.
The unrelated clients test is satisfied if your business provides services to two or more clients who are not associates of each other or associated with you.
So if I provide landscaping work to two clients that are not related to each other or to me, I will pass this test?
That’s right. And if Jason doesn’t pass this test, he’ll need to consider the employment test. The employment test is satisfied if you get employees to perform at least 20% by market value, of the work that you are being paid for. You'll also pass the employment test if you have one or more apprentices for at least half the income year The business premises test is satisfied if at all times of the year the business premises are used solely for the operation of the business and are not connected in any way to your residence.
As can be seen, of these three tests Jason could pass both the Unrelated clients test and the Employment test. He only needs to pass one of these three tests to satisfy the personal services income tests. Since he does this, the personal services income rules do not affect Jason.
If Jason did not pass the tests, he will not be able to claim certain deductions. For further information on the personal services income rules and how they may impact on you, visit ato.gov.au/PSI or seek professional advice from your tax adviser.
This video explains special personal services income (PSI) rules and how to work out if these rules apply to you.