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  • Appendix 9. Personal services income

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    PSI is income that is mainly a reward for an individual’s personal efforts or skills. If PSI is received by a company (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, in respect of each individual whose PSI is included in your income:

    • you meet the results test, or
    • 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 you 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 does the personal services work and must be included on their income tax return.
    • The personal services entity must either          
      • pay the PSI promptly, as salary or wages, to the individual who does the personal services work, or
      • attribute the net PSI to the individual who does the personal services work 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, and
    • 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.

    Deductions

    The deductions that may be limited include the following:

    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 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.
    Superannuation contributions

    You may claim a deduction for contributions that 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 to ensure 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

    These are:

    • 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 preparing or lodging 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 multiplied by individuals PSI divided by total PSI.

    Rent, 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 that:

    • 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 PSI receives a PAYG withholding credit for their income tax 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 income 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.

    Treatment of attributed PSI on your income tax return

    If PSI is attributed to an individual, the income is not assessable to the company. Include the PSI on the company tax return as follows:

    Include the attributed amount at Q Other income not included in assessable income item 7, as calculated in Worksheet 2 – other reconciliation items.

    The following example will help you complete the PSI details on the company tax return. The entity in the example is not conducting a personal services business.

    Example 20: Some salary or wages have been promptly paid, and some PSI is attributed to an individual because it has not been promptly paid as salary or wages.

    A company derives income that is the PSI of a director.

    Part of the PSI has been promptly paid as salary within 14 days of the end of the relevant PAYG withholding period. The company’s profit and loss statement is as follows:

    Income (all PSI of the director) = $100,000

    Less Expenses

    Salary = $30,000

    Rent for director’s home that is a place of business = $5,000

    Other expenses (all deductible) = $25,000

    Total = $60,000

    Net profit = $40,000

    The rent paid for the director’s home used as a place of business is not deductible under the alienation of PSI provisions. The net profit is PSI of the director and is attributed to the director for income tax purposes (together with the amount representing non-deductible rent expense).

    Income information

    Income

    Label

    Amount

    Other gross income

    6R

    $100,000

    Total income

    6S

    $100,000

    Expense information

    Expense

    Label

    Amount

    Rent expenses

    6H

    $5,000

    All other expenses

    6S

    $55,000

    Total expenses

    6Q

    $60,000

    Total profit or loss

    Calculation

    Label

    Amount

    (subtract Total expenses from Total income)

    6T

    $40,000

    Complete item 14 Personal services income as follows:

    Write the amount of income you included at 6R at 14A. Write the amount of expenses you included at 6Q at 14B.

    Profit or Loss

    Total profit or loss amount

    T6

    $40,000

    Add Non-deductible expenses (rent)

    7W

    $5,000

    Subtotal

    -

    $45,000

    Less Other income not included in assessable income

    7Q

    $45,000

    Subtraction items subtotal

    -

    $45,000

    Taxable income or loss

    T

    $0

     

    End of example

    Treatment of net PSI loss on your income tax return

    If an individual can deduct the net PSI loss, the total amount of the deductions to which the company is entitled is reduced by that amount. Include the PSI loss amounts on the company tax return as follows:

    Include the net PSI loss amounts at W Non-deductible expenses item 7 Reconciliation to taxable income or loss as calculated in Worksheet 2 – other reconciliation items.

    The following example will help you complete the PSI details on the company tax return. The entity in the example is not conducting a personal services business.

    Example 21: Company tax return (net PSI loss)

    Part of the PSI has been promptly paid as salary within 14 days of the end of the relevant PAYG withholding period.

    The company’s profit and loss statement is as follows:

    Income (all PSI of the director) = $75,000

    Less Expenses

    Salary = $40,000

    Salary for director’s son (non-principal work) = $10,000

    Other expenses (all deductible) = $40,000

    Total = $90,000

    Net profit = ($15,000)

    The salary paid to the director’s son for non-principal work is not deductible under the alienation of PSI provisions. In the calculation of net PSI the amount of $10,000 is non-deductible:

    The director is entitled to a deduction for the amount of the net PSI loss of $5,000. The deduction to which the company is entitled is reduced by this amount and the non-deductible amount.

    The information is entered at the following labels:

    Income information

    Income

    Label

    Amount

    Other gross income

    6R

    $75,000

    Total income

    6S

    $75,000

    Expense information

    Expense

    Label

    Amount

    All other expenses

    6S

    $90,000

    Total expenses

    6Q

    $90,000

    Total profit or loss

    Calculation

    Label

    Amount

    (subtract Total expenses from Total income)

    6T

    $15,000/L

    Item 7 Reconciliation to taxable income or loss is then completed as follows:

    Profit or Loss

    Total profit or loss amount

    T6

    $15,000/L

    Add Non-deductible expenses (salary paid to director’s son and reduction in total deductions for the net PSI loss that director is entitled to claim)

    7W

    $15,00

    Subtotal

    -

    $0

    Less Other income not included in assessable income

    7Q

    $0

    Subtraction items subtotal

    -

    $0

    Taxable income or loss

    T

    $0

     

    End of example

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    Last modified: 09 Dec 2020QC 62685