What is PSI?
Income is classified as PSI when more than 50 per cent of what an individual receives from a contract is a reward for their efforts or skills.
Income determined to be PSI is attributed to the individual and taxed at marginal tax rates.
PSI can be received in almost any industry, trade, or profession.
Common examples include professional services, information technology consultants, engineers, construction workers and medical practitioners.
Income generated from a business structure, use of assets or sale of goods is not classified as PSI and therefore not impacted by TR 2022/3.
The revised PSI guidance will also not affect:
- Contractual relationships between individuals and their clients or customers. That is, they do not become an employee or stop being a contractor.
- Entitlements to an Australian business number (ABN) or registration for goods and services tax (GST).
- Whether individuals are still considered to be running a business.
What are the PSI rules?
The ATO says its personal services income rules are designed to ensure a level playing field among individuals.
“They do this by preventing income earnt as a reward from an individual’s efforts or skills from being diverted, alienated, or split with other individuals or entities in an attempt to pay less tax,” the ATO spokesperson says.
“If you earn PSI and the PSI rules apply, there are special rules to ensure the income is attributed to you and not diverted to other individuals or entities.
“They can also affect the deductions you claim and how you report PSI in your tax return.”
The rules will not apply to individuals earning PSI in the same year they operate a PSB, however, they will still need to report PSI in their income tax return and keep records.
PSI rule tests
A PSB is being conducted if either the sole trader or personal services entity (PSE) meets the results test in relation to at least 75 per cent of their PSI, or less than 80 per cent of their PSI is from the same entity and its associates (the 80 per cent rule) and they satisfy one or more of the other PSB tests.
The results test is met if PSI income is for producing a result and if the sole trader or personal services entity is required to supply equipment or tools to complete work and would be liable for the cost of rectifying defects.
Other PSB tests include the unrelated clients test, employment test, and business premises test.
In some circumstances, those unable to self-assess as a PSB for a specific income year may be able to apply for a PSB determination (PSBD).
“If you are unable to self-assess as a PSB and do not have a PSBD for the relevant year, PSI rules will apply,” it states.
“You won’t be able to claim certain deductions against PSI and there are special ‘attribution’ rules to ensure that PSI is attributed to the individual who performed the work that generated the income.”
The ATO emphasises that even when PSI rules don’t apply, individuals still need to declare any PSI amounts they receive at the relevant labels on their tax returns and keep records of their business transactions.
The ATO may seek to apply Part IVA where there are factors indicating that the dominant purpose of the arrangement is to obtain a tax benefit by diverting, alienating or splitting an individual's PSI or retaining profits in the lower taxed PSB.
We can assist you to determine how PSI rules can effect your business.