If you run your professional affairs through a company, trust, or partnership and more than 50% of your income comes from your personal skills or efforts, then you are earning Personal Services Income (PSI).
This impacts the types of deductions you can claim, and the tax you must pay each year.
What is PSI?
PSI rules regulate the way knowledge-based, professional service businesses report income, the deductions available to the business, and the tax the business will pay. If you can satisfy the rules, you will be considered a Personal Services Business (PSB) and can apply the company tax rate to your income, rather than your marginal tax rate. Satisfying the tests also allows you to distribute dividends and access a wider range of deductions.
There are significant tax benefits to being a legitimate Personal Services Business (PSB), but the rules are complex. Just because you satisfy the requirements one year does not mean you’ll be eligible the following year, so it is something you should be aware of and review at least annually.
If you earn PSI and cannot pass the required tests, PSI rules will apply: you will be required to pay tax at your marginal tax rate, you will be limited to claiming certain deductions, and you will not be able to retain profits in your business.
To self-assess as a Personal Services Business, you must either meet the Results Test, or pass the 80% Rule AND meet another PSB test.
You must apply the tests for each individual generating PSI.
Read below for details of each test, or enter your email below to download our self-assessment checklist.
The PSI rules are complex, so we recommend you take professional advice on your personal situation.
Enter your email to download the PSI Checklist
The Results Test
The Results Test is the primary test for determining if you can self-assess as a PSB or if your income will be subject to PSI rules. An individual or their trading entity will be treated as a personal services business if they receive at least 75% of the personal services income for producing a result.
You must be able to satisfy all 3 conditions below for at least 75% of your PSI earnt:
- Have you been paid to produce a specific result? AND
- Are you required to provide your own tools or equipment to do the work? AND
- Are you required to fix mistakes at your own costs?
If you answered “yes” for all of the above, you may satisfy the Results Test and may qualify for the PSB Exemptions. If you answered “no” to any of the above then you will need to pass the 80% rule AND satisfy one of the other extended PSB tests.
The 80% test
- Is 80% or more of the individual’s Personal Services Income from one source? (‘one source’ includes related entities)
If ‘YES’, you cannot self-assess, do not proceed with other extended tests. You must seek a Commissioner of Taxation’s Determination to establish your status as a personal service business.
If “no”, proceed to the extended tests.
Unrelated clients test
- Are services provided to two or more clients? (clients must be unrelated to each other and the entity) AND
- Are the services provided as a direct result of the entity advertising to the public or a section of the public?
In order to satisfy the unrelated clients test, you must make a public offer E.G. via a website, or paid print/digital advertising etc. Word of mouth referrals & work won through recruiters / agency will not satisfy this test.
If ‘YES’, for all of the above, the Unrelated Clients Test will be satisfied
- Does the entity employ or contract other entities to perform work that generates the income? AND (either of the following apply)
- At least 20% of the principal work is performed by those employed or contracted entities OR
- The entity has one or more apprentices employed for at least half of the income year.
If ‘YES’, the Employment Test will be satisfied
Business Premises Test
- The entity maintains and uses business premises, at all times during the year AND
- The premises are used mainly by the entity for activities which generate the PSI AND
- The entity has exclusive use of those business premises AND
- The business premises are physically separate from any premises used for private purposes by the entity or an associate AND
- The business premises are physically separate from any premises of the client and the client’s associate(s).
If ‘YES’, the Business Premises Test will be satisfied
The PSI rules are complex, and your eligibility as a Personal Services Business can change from year to year, so it’s important you take professional advice on your personal situation.
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