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Personal Services Income – myths and reality

What is Personal Services Income (PSI)?

According to the ATOs definition, Personal Services Income (PSI) is income produced mainly from your personal skills or efforts as an individual.

Personal Services Income can be derived from just about any industry – i.e. a trade or profession.

Some common examples include financial professionals, information technology consultants, engineers, construction workers and medical practitioners.

Note that PSI does not affect you if you're an employee receiving only salaries and wages – PSI ramifications are mainly for contract related work.

What is the tax significance of PSI?

Income is classified as PSI when more than 50% of the amount you received for a contract was for your labour, skills or expertise.

In this case, you will need determine if any of your income is classified as PSI.

If it is, then you need to work out if special tax rules (the PSI rules) apply to that income.

In last few years, there has been a significant rise in contracting work, especially in the field of Information Technology.

People are taking up IT contracts working through employment agencies and setting up their own companies to process payroll.

However, these same people are under some misguided assumptions when it comes to PSI and tax claims.

For example;

  • Distribution of income or income splitting, payments to associates i.e. spouse for doing minor work which is not related to the principal work.

  • Leaving income in the company as company will pay lower tax than individual’s own marginal tax rate.

  • Being able to claim deductions for rent, mortgage interest, rates and land tax (denied under Sec85-15 under Taxation Ruling TR 2003/10)

When PSI rules apply, your tax deductions and income tax return obligations will be affected – and these obligations are different to those of individual returns. Having some clear understanding on what can be done and what cannot be done, I feel this would give individuals some clear understanding and making informed decisions.

What can I deduct under PSI?

The following are eligible for tax deductions under PSI.

  • the cost of gaining work, such as advertising, tenders and quotes

  • registration and licencing fees

  • account-keeping fees, including bank fees

  • some insurance costs, including public liability and professional indemnity insurance fees

  • the salary/wages and super contributions for an employee, or reasonable amounts payed to an associate for ‘principle work’

  • a portion of home office expenses, such as heating, lighting, phone and internet (but not rent, mortgage interest, rates or land taxes).

Personal Services Income has grown in importance over the years simply due to the outsourcing and freelancing economy.

Today, it’s even easier to start a business as a freelancer or contract worker.

Yet, from a tax perspective, it’s not as simple and as straightforward as that or at times it is not as attractive from taxation point off view as most of us might think it is or want it to be.

There are many considerations and potential pitfalls – knowing what you can and can’t do will make the difference between financial success and a world of potential pain.

To find out more about how to best manage and maximise your Personal Services Income, call 1300 APERTURE or 1300 273 788.

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