According to the Australian Taxation Office (ATO), personal services income is an income that is a reward for your skills or efforts as an individual. Now, the question arises, do you offer services or products that depend on your personal skills? If so, the income you receive is considered personal services income (PSI). It can be received in almost any industry and can affect tax obligations and deductions. Accountants in an accounting firm in Melbourne have in-depth knowledge of every aspect of tax. If you don’t know about PSI, you can also ask them. Moreover, keep reading this blog to know about personal services income.
What is Personal Services Income (PSI)?
Income is termed as PSI when over 50% of the income you’ve received from a contract for your personal skills or efforts as a reward, rather than being produced by the use of assets, from a business structure or the sale of goods. If 50% or less of the income you received from a contract was for your personal efforts, then none of the income is considered PSI.
What Deductions Can Be Claimed When Receiving PSI?
Deductions can be claimed if an expense is incurred or paid in producing or gaining assessable income. The expense can’t be private, domestic or capital. Being a sole trader, you can claim deductions against PSI in your individual tax return. If the PSI is earned through a partnership, company, or trust, the business minimises the amount of PSI that is awarded to an individual by the deduction amount. The deductions are for expenses that are paid in getting that individual’s PSI. Furthermore, you can also opt for services of business accounting in Melbourne to know everything about PSI.
The following are allowable deductions:
- Gaining work cost, e.g. tendering, advertising, and quoting for work
- Licensing and registration fees
- Account-keeping fees
- Insurance costs, including professional indemnity insurance fees
- Wages or salary and other expenses for an employee engaged, which is not an associate
- A part of home office expenses, such as lighting, heating, internet and phone
- Income-generating assets’ depreciation
Trusts and companies can claim all their motor vehicle expenses, although private use of their vehicle is liable to fringe benefits tax (FBT). The PSI rules add another rule for businesses with motor vehicle expenses. If your personal services are contracted via partnership, company, or trust and the PSI rules apply, then your business can claim expenses for one car if the vehicle is used for private purposes. Services providers of accounting in Melbourne can help keep you updated with such information.
Deductions that can’t be claimed against PSI
When personal services income rules apply, you are not allowed to claim deductions against the PSI for:
- Mortgage interest, rent, land tax and rates
- Payments to associates for non-principal work
- Super contributions for associates’ non-principal work
In addition to this, PSI is not applicable for a small business income tax offset.
Non-deductible expenses are not allowed to claim against your PSI. These expenses can’t be used to minimise PSI awarded to the individual that is included in their individual tax return. To avoid paying double tax, where you pay an associate that is non-deductible under the PSI rules, the amount you’ve received from the associate is not included in their assessable income.
When PSI Rules Don’t Apply
If you operate your business through a trust or company, income received by the trust or company from the provision of your personal services will be rewarded to you unless:
- The trust or company is conducting a PSB, i.e. personal services business or
- The PSI was paid to you as wages or salary
There will be no changes to your tax obligations when you are a PSB, except that you must announce any PSI on your tax return.
The blog shares information on personal services income (PSI) along with deductions you can claim as well as deductions you can’t claim. In addition to this, you also came to know what would happen when PSI rules don’t apply. Moreover, if you are still confused about PSI, you can also seek help from Reliable Melbourne Accountants.