What is Personal Services Income?

Personal Services Income, or PSI, is the income derived by an individual mainly as a result of their personal work or exertion, rather than the sale of goods or use of assets. The individual may operate as a sole trader, or through a trust, partnership, or company structure. You can receive PSI in almost any industry or profession, but it is commonly seen within the Professional Services sector (namely among accountants, lawyers, consultants and engineers, etc) and medical practitioners.

What are the PSI rules?

The PSI rules are a set of rules that affect how your income in reported and what deductions you can claim. It's important to note that these rules are not new but can often be ignored.

Working out if PSI rules Apply to You

If you have received Personal Services Income, you need to work out whether the PSI rules apply or if you are considered a 'Personal Services Business'.

A Personal Services Business, or PSB, is an individual who is still earning PSI but in a more business-like manner, for example, they might have staff, business premises, and unrelated clients. A lot of medical practitioners operating under independent agreements with a practice may fall into this category.

Consequences of being caught under PSI rule

If PSI rules apply to you, you will not be able to claim certain deductions against your Personal Services Income that would not be available to you if you were receiving that income as a employee.

Regardless of whether the PSI rules apply or not, when operating through a trust, partnership, or company structure, the tax treatment of income from PSI falls under the PSI attribution regime, meaning that the new income earned by the individual is attributed back to the individual who earned that income, similar to if you were a sole trader or employee. This means that the individual will pay tax on that income, not the entity. The income must also be taxed in the year that it is earned, and cannot be deferred.

For example, a professional services operating through a company may earn $300,000 in PSI from charging clients during the financial year. After business expenses, this income must, under law, be included in the practitioner's individual tax return in the year it has been earned.

The individual does not have the option to:

• leave significant amounts of income in the company to be taxed at the company tax rate, or
• split the income with family members to reduce tax. 

The common misconception we have seen is that when individuals operate through a structure, such as a company or trust, they mistakenly believe that they are able to split income or retain profits in a company to utilise a lower tax rate. Both scenarios are caught under Part IVA which is an anti-avoidance of tax provision and would incur substantial penalties from the ATO.

For More Information

If you would like more information about Personal Services Income or whether the PSI rules apply to you, please contact us on (07) 3002 2699 | info@agredshaw.com.au.