Income from personal services, referred to as Personal Services Income (PSI), is earned predominantly through the individual's own efforts, skills, knowledge, and experience.
It is required that these services are carried out personally and require some form of personal effort.
Personal Services Businesses are approached differently from other businesses in Australia and therefore the Australian Taxation Office (ATO) has special rules for them to determine if the income should be considered as PSI or not.
Income generated from personal services provided by an individual, regardless of the business structure (e.g. company or trust), is considered personal service income. This is subject to the PSI rules and treated as personal income and not business income.
PSI is an acronym for Personal Service Income. It is income you earn from providing individual or personal service entity such as a company or trust.
The ATO has specific income rules that apply to PSI and how it is taxed.
If your income is treated as a personal services, the income will be treated as your individual income in most cases, instead of the business income of the entity through which it was earned.
To determine if you earn for PSI, you need to consider whether the services are provided personally or not. This means that your personal efforts are required for the earnings.
It is important to understand the PSI rules so that you can accurately identify what type of income you are receiving and how it should be taxed.
Personal Services Income (PSI) applies if income is to provide services as a direct result of one’s labour, personal skill, expertise or knowledge.
Personal Service Business (PSB) refers to income received from a business entity in which the main income comes from one individual's personal skill or labour.
The ATO has specific rules for determining whether the income received is PSI and subject to the relevant PSI tax rules. If you pass the results test, a set determination from the ATO if a service is provided as an employee or contractor and if the income should be classified as PSI. These rules are complex.
If you are classed as a Personal Services Business it may affect your deduction entitlements on your tax return. Generally, if you provide your services as a sole trader or through a business structure such as a company or trust, the PSB and the PSI rules will need to be reviewed.
When setting up a business structure and earning the psi in the course of the income produced check whether the rules apply.
If you need help with your personal services entity, hiring the service of a professional is the best way to go. An accountant can provide tax advice and assist with filing your PSI income tax return.
They understand the rules and regulations of the government, so they can ensure that you are taking all of the deductions and not overpaying on taxes.
They can also help you create a budget and plan for future growth. Accountants will review financial statements, analyse taxes, and provide bookkeeping services as needed. With their expertise, you can be sure that your business will run smoothly and remain compliant with all applicable laws.
Conducting a Personal Services Business (PSB) is a type of business venture where personal services are provided to customers.
It is important to note that there are personal services business tests like: unrelated clients test, to determine if income is classified as PSI. Income that is mainly derived from personal efforts or skills, is income earned from personal services that is incidental or less than 80% of the total income for the income year.
The ATO has specific guidelines regarding how to conduct a PSB, and it is important to follow them closely for proper tax deductions. This includes reporting income from personal services separately from other income sources on your tax return.
Additionally, you must be able to prove that you have taken steps to run your business as a separate entity, such as having a separate bank account and keeping records of all transactions related to your PSB.
By conducting a PSB correctly, you can ensure that you maximise deductions while minimising taxes due on the income received as a reward for the personal efforts. Additionally, by following ATO guidelines, you can avoid any potential penalties or fines associated with not properly reporting your income from personal services.
