Personal Services Income and You
If you operate your business through a company or a trust, income earned by the company or trust from the provision of your personal services (personal services income or PSI) will be attributed to you unless:
- the company or trust is carrying on a personal services business (PSB); or;
- the PSI was promptly paid to you as salary or wages.
The company or trust will be conducting a PSB if at least one of a number of tests are satisfied. These are:
- the results test (the most important test) – this is based on common law criteria for characterising an independent contractor (in contrast to an employee/employer relationship);
- the unrelated clients test – this requires the PSI to be earned from at least 2 unrelated clients who contract your services as a direct result of an advertisement or other public offer of your services. A recent Full Federal Court case has confirmed that the test can be satisfied if your services are advertised through LinkedIn and the work is obtained as a direct result of that advertising;
- the employment test – this requires at least 20% (by market value) of your work to be performed by employees who are not your associates;
- the business premises test – this requires you to use business premises that meet certain conditions (e.g. you have exclusive use of the premises and the premises must be physically separate from any premises you use for private purposes).
If 80% or more of your PSI (with certain exceptions) is income from one client (or the client and their associate[s]) and the results test is not met, the company or trust will need to obtain a PSB determination from the ATO. Otherwise, the company or trust will not be conducting a PSB.
The company or trust cannot deduct amounts that relate to gaining or producing your PSI, unless you could have deducted the amount as an individual or the company or trust received the PSI in the course of carrying on a PSB.
If the company or trust does not conduct a PSB, additional PAYG withholding obligations can arise.
Even if you don’t use a company or trust to derive your PSI, there are limitations on the deductions that you may claim against your PSI. For example, you may not be able to deduct certain home office expenses.
PSI rules are complicated. Get in touch with avance if your services are provided through a company or trust.