What is Personal Services Income?
You may have heard of the term “Personal Services Income” and like most people, you could be confused as to what it actually means for you and your business. Below are some general guidelines as to the background behind it and the outcomes the ATO are trying to achieve:
In 2000, the ATO introduced Personal Services Income (PSI) rules. The reason being, there was a growing trend for professionals to resign their employment, establish a business and provide consulting services to their ex-employer.
In addition to this, such professionals availed themselves of the ability to split income by employing their spouse or other related parties. They provided them with plant and equipment e.g. Motor Vehicles to undertake non-technical work and thereby reducing the overall tax paid on the gross fees received.
The ATO is concerned on two levels:
- The Income tax that they were receiving, on these gross fees was less under these arrangements, and
- The timing of receipt of payments had shifted from monthly to annually
In 2000, the ATO introduced legislation which was designed to put a stop to these arrangements.
The crux of the legislation says that no matter how a professional chooses to set up their affairs (company, trust or any other business arrangement), the PSI rules ensure that the income generated, end up in the professional’s personal Tax return. What’s more, if the entity is carrying on multiple businesses, these rules apply to each business type and each professional individual working within that business.
Principally if you are subject to PSI rules, Income Tax is generally required to be remitted to the ATO either monthly or quarterly and the following deductions are not available to you:
- Rent, Mortgage Interest, rates and Land Tax
- Payments i.e wages or super contributions made to associates for work or incidental work not central to meeting contract obligations.
In the case of Personal Services Income Businesses (PSB) where there are individuals providing PSI, but are supported by staff and contractors of equivalent numbers or more, undertaking the same professional work, then different rules apply. The ATO is currently redrafting guidelines around how payments to principals of these businesses can be made to ensure that the entities remain of “low-risk” in the eyes of the Tax office.