PSI is income that is mainly a reward for an individual's personal efforts or skills. If PSI is received by an entity (a personal services entity) it is still the individual's PSI for income tax purposes.
The PSI rules do not affect PSI received by employees, except when the individual is an employee of a personal services entity. The rules also do not apply to PSI that is earned in the course of conducting a personal services business.
What is a personal services business?
You qualify as a personal services business if:
- you meet the results test
- less than 80% of the individual’s PSI in an income year comes from each client (and their associates) and you meet either the unrelated clients test, the employment test or the business premises test, or
- you obtain a determination from the Commissioner of Taxation confirming that you are a personal services business.
What if I do not qualify as a personal services business and the PSI rules apply?
Generally, if the rules apply to you there are three main effects:
- The PSI, reduced by certain deductions to which the personal services entity is entitled, is treated as the income of the individual who generated the PSI and must be included in their income tax return.
- The personal services entity must either
- pay the PSI promptly, as salary or wages, to the individual who generated the PSI, or
- attribute the net PSI to the individual who generated the PSI and withhold and remit tax on that income.
- The deductions that may be claimed are limited.
If the personal services entity has made a net PSI loss:
- the individual is entitled to a deduction for the loss
- the total amount of the deductions to which the entity is entitled is reduced by the amount of the individual’s deduction for the loss.
The deductions that may be limited include:
- certain car expenses
- superannuation contributions
- entity maintenance deductions
- mortgage interest, rates and land tax
- payments to associates.
Certain car expenses
You may deduct:
- a car expense for each car used solely for business purposes
- a car expense or an amount of fringe benefits tax payable for a car fringe benefit where a car is used partly for private purposes.
However, there cannot be, at the same time, more than one car for which such deductions can arise in relation to gaining or producing the same individual’s PSI. If there is more than one car used privately at the same time for the same individual, you must choose one car only for which to claim deductions. The choice remains in effect until you cease to hold that car.
You may be able to claim a deduction for a portion of the contributions you make to a complying superannuation fund or retirement savings account (RSA) for the purpose of making provision for superannuation benefits for an individual whose PSI you derive.
However, if the individual:
- performs less than 20% of your principal work, and
- is an associate of another individual whose PSI you derive
then your deduction cannot exceed the amount you would have to contribute for the associate to ensure that you did not have an individual superannuation guarantee shortfall for that associate.
If the associate only performs non-principal work, you cannot claim any deduction relating to PSI for contributions you make to a complying superannuation fund or RSA for the associate.
Entity maintenance deductions
- fees or charges associated with an account with an authorised deposit-taking institution (but not including interest or interest-like amounts)
- tax-related expenses
- any expense incurred in relation to the preparation or lodgment of a document under Corporations Law, except if the payment is made to an associate, and
- certain statutory fees.
Entity maintenance deductions must first be offset against your other income. If the entity maintenance deductions exceed your other income, the excess of the entity maintenance deductions may reduce PSI attributable to the individuals.
If your income includes the PSI of more than one individual, apportion the excess entity maintenance deductions between the individuals using the following formula:
excess entity maintenance deductions x (individual’s PSI/total PSI)
Mortgage interest, rates and land tax
You cannot deduct amounts that are incurred in gaining or producing an individual’s PSI if such amounts represent rent, mortgage interest, rates and land tax for the residence of the individual or the residence of an associate of yours.
Payments to associates
You cannot deduct payments to associates or any amount you incur from an obligation you have to your associate to the extent the payment or obligation relates to the associate performing non-principal work.
Additional PAYG withholding obligations
When the PSI rules apply, you will have additional PAYG obligations for the amount attributed (treated as belonging) to each individual who generated the PSI.
The additional PAYG withholding obligation ensures:
- an amount of withholding has been reported and paid to us for the attributed income (the income treated as belonging to the individual who generated the PSI)
- each individual who generated the PSI receives a PAYG withholding credit for their individual return.
Normal PAYG withholding applies to the PSI you received that is promptly paid out to the individual as salary or wages.
An individual receiving such salary or wages must complete item 1 Salary or wages on their individual tax return.
If you have a net PSI loss for an income year, there are no additional PAYG withholding obligations as no income has been attributed.
Include adjustments for PSI at item 5 Reconciliation items. See Treatment of attributed PSI on your trust tax return at item 30.