The ATO has recently updated its ruling on Personal Services Income (PSI) to incorporate a myriad of significant court and AAT decisions that have occurred since the original rulings were issued almost 20 years ago. So now is the perfect time for a refresher on the basics of PSI and associated personal services entities (PSEs).
Firstly, PSI only applies to individuals and is income that is mainly reward for personal effort or skills. That is, more than 50% of the ordinary or statutory income received needs to be reward for personal efforts and skills of the individual. Income that is principally generated from supply or sale of goods, supply and use of income-producing assets, or by a specific business structure are not considered to be PSI.
If you’re determined to have earned PSI, the deductions that can be claimed will be limited to the deductions that you could’ve claimed if you were an employee and the income earned was salary and wages. This means that, for example, you’ll be unable to deduct rent, mortgage, interest, rates or land tax in relation to a residence or part of a residence that you use to gain or produce PSI.
To avoid that outcome, an individual/PSE can self-assess whether or not they conduct a Personal Services Business (PSB) in an income year, against one of the 4 tests set out below. If any one of the 4 tests is met during an income year, the PSI rules will not apply to limit deductions:
However, if more than 80% of the PSI or PSE’s income is from one source (ie the same entity and/or its associates), then only the results test can be used to self-assess whether they conduct a PSB. Individuals and PSEs can also apply to the Commissioner for a Personal Services Business Determination to get certainty on their unique situation.