Personal Service income has continued to be in the spotlight with the ATO. In recent times, we have started working with several new clients who are affected by the Personal Services Income (PSI) rules. Most people (including many Accountants) do not understand how the Personal Services Income rules apply, which can lead to significant tax penalties for the individual involved.
What is Personal Services Income?
Personal Services Income is defined as ‘ordinary or statutory income that is gained mainly as a reward for the personal efforts and skills of an individual’. The ATO defines ‘mainly’ as more than 50%. Once we have established that your income fits the definition of Personal Services Income, there are several other rules and tests that need to be applied to see whether your income must be attributed (taxed) to the individual or whether you are running a Personal Services Business (PSB).
What happens if the Personal Services Income rules apply to me?
It will have the following consequences:
It limits your tax deductions to those available to an employee;
It removes your ability to split income with your spouse;
It removes your ability to pay tax at lower tax rates within a company structure;
It triggers additional PAYG obligations.
In simple terms, you are taxed in your personal income tax return on your personal services income.
You may qualify as a Personal Services Business
By qualifying as a PSB, you may be entitled to some benefits:
You may be entitled to further tax deductions (like a normal business);
You may be able to pay your spouse a commercial wage for work performed.
What to do next?
If you believe that either the Personal Service Income or Personal Services Business rules may apply to you, it is important to seek professional advice. Please contact our office on 08 9381 2704 or firstname.lastname@example.org to book your free review meeting.
For further information
Please see the following ATO link. https://www.ato.gov.au/Business/Personal-services-income/
Every effort has been made to offer the most current, correct and clearly expressed information possible within this blog. Nonetheless, inadvertent errors can occur and applicable laws, rules and regulations may change. The information contained in this site is general and is not intended to serve as advice. No warranty is given in relation to the accuracy or reliability of any information. Users should not act or fail to act on the basis of information contained herein. Users are encouraged to contact Affluence Chartered Accountants for advice concerning specific matters before making any decisions.