The PSI rules do not affect you if you're an employee receiving only salary and wages.
However, if you earn PSI indirectly through another entity (such as a company, partnership or trust) and you are an employee of that entity, then the PSI rules may still apply to that PSI.
There are a number of factors that determine whether you're working as a contractor or as an employee. See Employee or contractor – what's the difference for more information.
Although your personal efforts or skills may be required to make or produce an item for sale, where income is produced mainly from supplying or selling goods then the income is not PSI.
Where materials are only a minor part of the services provided, this is not regarded as supplying or selling goods. For example:
- the use of art supplies by a graphic designer in doing design work for a client
- the use of wiring by an electrician when installing wiring into a building.
Example 1: income from the sale of goods
Tam is a carpenter who operates a partnership with her spouse, Cho. Tam designs and constructs bespoke furniture and sells it through the partnership via the internet and at trade fairs. The payments made to the partnership are for the sale of the furniture rather than Tam’s personal efforts or skills. Therefore, the income derived by the partnership is not PSI.End of example
Example 2: income is not from the sale of goods
Henry is a plumber who operates as a sole trader. He receives a contract to repair a toilet and sink. He charges $80 for materials and $250 for his labour. The total of the invoice is $330.
This income ($330) is Henry’s PSI as it is mainly a reward for his personal efforts or skills, and not for the sale of goods or materials.End of example
Income that is generated mainly by an asset rather than an individual's efforts or skills is not PSI. It's more likely that income is being generated by an asset if the asset is:
- essential to performing the work
- large scale or high value
- specified in a contract.
In such cases, the asset is likely to represent more than 50% of the contract price. Therefore the income is not mainly attributable to the efforts or skills of an individual.
Example 3: income from the supply or use of an income-producing asset
Jack is an experienced backhoe operator. His family company, Jack & Jill Pty Ltd owns a 10-tonne truck and a backhoe. Jack & Jill Pty Ltd enters into a contract with the Main Roads Department to dig trenches for laying sewerage pipes. The contract specifies that Jack & Jill Pty Ltd supplies a tractor with a backhoe and other special attachments, together with a licensed backhoe operator to work at specific locations.
Jack transports the backhoe on the truck to various construction sites at the request of the Main Roads Department. He then uses the backhoe to dig the trenches. The contract requires Jack & Jill Pty Ltd to provide specific plant and equipment to do the work. Without the backhoe and the truck, Jack & Jill Pty Ltd would not be able to gain or produce income.
The amount that is invoiced to the Main Roads Department is not mainly for the efforts and skills of Jack. The amount earned is mainly from the supply and use of the truck and backhoe. The income is therefore considered to be for the supply and use of income-producing assets and is not PSI.End of example
Example 4: income is not from the supply or use of an income producing asset
Masha is a computer programmer, providing her services to clients through her trust, MH Trust. MH Trust contracts with Syntax Co to provide Masha's services in designing and building a new computer program. The program is intellectual property and all rights to its design belong to Syntax Co under the contract and not Masha or MH Trust. The new program will be owned by Syntax Co and copyright claimed.
The amount that is invoiced to Syntax Co is mainly for the efforts and skills of Masha in designing and building the new program. The income is therefore PSI.
This would be different if Masha had already designed and created a computer program and Syntax Co wanted to pay for the right to use the program. The income MH Trust receives from Syntax Co for use of the program (but not ownership of the program) would be considered to be for the supply and use of an income-producing asset and would not be PSI.End of example
Income generated from the business structure of an entity, rather than from an individual's personal services, is not PSI.
The following information can help you decide whether your income is generated by a business structure.
Business structure factors to consider
Income is more likely to be generated from a business structure if your business has substantial income-producing assets, a number of employees, or both.
While you should consider your particular circumstances, the following factors will help you determine whether your income is generated by a business structure:
- the extent to which the income depends on a particular individual's own personal skills, efforts or expertise
- the number of arm's-length employees or others (for example, contractors) engaged to perform the work
- any presence of goodwill
- the extent to which income-producing assets are used to derive the income
- the nature of the activities carried out
- the size of the operation.
After considering these factors, if you determine that your income is generated from a business structure, then that income is not PSI.
Example 5: income from a business structure
Bella is an electrician who operates a partnership with her spouse, Jake. Jake does not perform any of the electrical work but performs some of the administrative work, like invoicing. Bella undertakes the work required by clients and engages 3 full-time employees who undertake electrical work for her. The partnership owns 2 vans equipped with the necessary tools and equipment that are used by Bella and her employees. The partnership has generated goodwill, having a trade name and approximately 150 regular clients.
The income is derived from the business structure of the partnership and is not PSI.End of example
Example 6: income not from a business structure
Connie is an IT consultant who operates through a partnership with her brother, Luke, to provide IT services. Luke does not engage in any of the principal work of the partnership (that is, IT activities) although he provides minor administrative assistance. The partnership has no significant assets, no employees or other workers, and has not generated any significant goodwill. The income is not derived from the business structure of the partnership. As Connie is performing all the principal work of the partnership, the income derived by the partnership is Connie’s PSI as it is mainly a reward for her personal efforts and skills.End of example
If you're unsure whether you generate income through a business structure, you may need to seek further advice from us or a registered tax professional.
Other resources you can refer to:
- Taxation Ruling TR 2022/3 Income tax: personal services income and personal services businesses
- Find out more about professional firms if your arrangement involves one.