When more than 50% of your income is produced from your personal efforts or skills, then it is considered Personal Services Income (PSI). When you check out if your income is PSI, you must look at the income you received from each contract.
Who Can Earn Personal Services Income (PSI)?
You can earn personal services income in any industry, profession or trade. The following are some common examples but are not limited to:
- engineers
- financial professionals
- IT consultants
- construction workers
- medical practitioners.
Basically, PSI is a reward for an individual’s skills or efforts, only individuals can earn personal services income (PSI). Individuals can earn personal services income either directly as a sole trader or indirectly through partnership, company or trust.
Have You Made Money Through Your Personal Efforts or Skills?
Is more than 50% of your income generated from a contract because of your personal efforts, rather than generated from a business structure, the use of assets, or the sale of goods? If so, your income is considered personal services income (PSI).
For instance, John charges $250 for a plumbing job. He charges $60 for the tools he supplied and the rest is for his labour. He earned more than 50% of his income from his skills or efforts, so the income is considered PSI. If you earn a PSI, you need to check if you are a personal services business (PSB) in the year when you received the PSI. It will affect the deductions you can claim.
Self-Assessing as a PSB
You can self-assess as a personal services business if you:
- satisfy the results test for at least 75% of your personal services income, or
- satisfy one of the other PSB tests, and less than 80% of your personal services income is from the same contract and its associates.
If you self-assess as a personal services business, you will need to mention your PSI in your income tax return and maintain certain records. If you can’t self-assess as a PSB for a specific income year, you could apply for a PSB determination (PSBD) in some cases. Moreover, it is essential to mention PSI correctly in your tax return because it can have an impact on the deductions you can claim. You can also seek help from a registered tax accountant in Melbourne to discuss your business’s circumstances. If you self-assess as a personal services business or have a PSBD, then the PSI rule will not apply to the personal services income you receive in that income year.
The PSI rules will not affect:
- the contractual relationship between you and your customers
- your liability for an Australian Business Number (ABN) or registration for goods and services tax (GST)
- whether you still run a business.
What If the PSI Rules Don’t Apply?
Even if the PSI rules don’t apply, you still have to report any PSI amounts on your tax return at the relevant labels. If you obtained personal services income but PSI rules are not applicable, there will be no changes to the deductions you can claim against the income. The PSI rules will not be applicable in case you enter into an arrangement where the aim is to get a tax benefit, the general anti-avoidance rules may apply.
Record Keeping for PSI
Recording your expenses and income is important to know what income goes through your business and why. You are required to maintain records that will showcase all financial transactions related to your tax matters, including personal services income (PSI).
Basically, you have to maintain records of most transactions for 5 years in English. The time period of 5 years starts from when you obtained the records. When you check if you receive PSI, you have to maintain records that demonstrate:
- whether the income is considered PSI
- how you work out if the PSI rules apply
- which expenses apply to any received PSI, and
- potential deductions you are liable to claim against the PSI.
Conclusion
The blog shares whether PSI rules apply to you or not along with record keeping for PSI. Moreover, if you find it difficult to understand your PSI, you can also contact Reliable Melbourne Accountants.
More Useful Links: