On Point Tax

Personal services income

Reading time: 3 mins

If you operate your business through a company or a trust, income earned by the company or trust from the provision of your personal services (personal services income or PSI) will be attributed to you unless:

  • the company or trust is carrying on a personal services business (PSB); or
  • the PSI was promptly paid to you as salary or wages.

The company or trust will be carrying on a PSB if at least one of a number of tests are satisfied. These are the:

  • Results test (this is the primary test) - this is based on common law criteria for characterising an independent contractor (in contrast to an employee/employer relationship);
  • Unrelated clients test - this requires the PSI to be earned from at least two unrelated clients who contract your services as a direct result of making offers or invitations (for example, by advertising) to the public to provide your services;
  • Employment test - this requires at least 20% (by market value) of your work to be performed by employees;
  • Business premises test - this requires you to use business premises that meet certain conditions (eg you have exclusive use of the premises and the premises must be physically separate from any premises you use for private purposes).

If 80% or more of your PSI (with certain exceptions) is income from one client (or the client and their associate(s)) and the results test is not met, the company or trust will need to obtain a PSB determination from the ATO.

The company or trust cannot deduct amounts that relate to gaining or producing your PSI, unless you could have deducted the amount as an individual or the company or trust received the PSI in the course of carrying on a PSB.

Even if you don't use a company or trust to derive your PSI, there are limitations on the deductions that you may claim against your PSI. For example, you may not be able to deduct certain home office expenses, eg occupancy expenses such as mortgage interest or rent.

Chartered Accountants Australia and New Zealand
The Tax Institute - Chartered Tax Adviser
Registered Tax Practitioners Board - Tax Agent 25996489

Our Managing Director Chris Dugan is a Fellow of Chartered Accountants Australia New Zealand, a Chartered Tax Adviser and a Fellow of the Tax Institute of Australia.

Call to have a confidential discussion about any tax or business needs.