What does PSI stand for?
PSI stands for Personal Services Income. This is income generated primarily by your skills or efforts as an individual.
What is personal services income?
You receive personal services income, or another entity connected with you, which is mainly a reward for your personal skill or effort, for instance:
- Income you earn as an independent contractor
- Income received by a trust or company that you offer your personal services through.
The PSI rules are integrity rules that enhance fairness. The rules prevent those who are not carrying on a personal services business from diverting their personal services income to an entity or person linked with them who will pay less tax on the PSI. The rules also prevent the person or the entity receiving the PSI from claiming deductions for expenses that they won’t be eligible to claim if they had received the PSI as an employee.
Who earns PSI?
You can receive PSI in almost any industry, profession or trade. Here are some common examples, but are not limited to:
- Financial professionals
- Information technology consultants
- Engineers
- Construction workers
- Medical practitioners
Only individuals can earn PSI, as it is mainly a reward for an individual’s personal efforts or skills. Individuals can earn PSI either directly as a sole trader or through another entity such as a partnership, company, or trust. When an individual earns PSI indirectly via another entity, then that entity is called a personal services entity (PSE).
When PSI rules apply to you
If you have worked out that the received income is PSI, then you need to work out whether the PSI rules apply to you. To do this, you must work out if you are a personal services business in the year that you received PSI. You are allowed to self-assess as a PSB if you:
- Meet the result test in association with at least 75% of your PSI, or
- Meet one of the other PSB tests and less than 80% of your PSI is from the same entity and its associates.
The other PSB tests are the Unrelated Clients test, business premises test, and employment test. If you are a partnership, company, or trust, and have more than one individual generating PSI, the self-assessment rules and PSB tests must be applied to each individual. One individual is allowed to conduct a PSB but not another. If you cannot self-assess as a PSB for a specific income year, you may be able to apply for a PSB determination in some circumstances.
If you self-assess as a PSB, or have a PSBD, then the PSI rules will not apply to the PSI you receive in that specific income year. The PSI rules will not affect:
- The contractual relationships between you and your clients – for instance, you don’t become an employee or stop being a contractor.
- Your entitlement to an ABN or registration for goods and services tax.
- Whether you are still considered to be running a business.
If you are still not sure, you can speak to the best accountant Melbourne.
Income that is not PSI
- Wage and salary earners
If you are an employee and receive only salary and wages, then the PSI rules won’t affect you. However, if you receive PSI indirectly through another entity and you are an employee of that entity, then the PSI rules may apply.
- Supplying or selling goods
Although your personal skills may be needed to produce an item for sale, where income is generated from selling goods, then the income is not PSI.
- Supplying or using an income-generating asset
Income generated by an asset rather than an individual’s skills is not PSI. In such cases, the asset may represent more than 50% of the contract price.
- Income from a business structure
Income generated from a business structure of an entity is not PSI.
PSI vs PSB
PSI stands for Personal Services Income and is usually rewarded for your personal skills or efforts, whereas a PSB stands for Personal Services Business, which is a classification where the ATO identifies your activity as a genuine, independent business rather than an individual employee arrangement.
Conclusion
There are conditions when PSI rules apply, so you need to understand those conditions to work out if the PSI rules apply to your income. To learn more about PSI and check whether the rules apply to your income, you can seek help from Reliable Melbourne Accountant.