A common issue that we are asked to advise on is Personal Service Income and that of its disadvantages. 

Personal Services Income is identified by the Australian Taxation Office as ‘Personal Services income, defined as a reward for, or the result of your personal efforts or skills, can affect tax obligations for contractors or consultants.’

Personal Services Income rules can apply to sole traders, partnerships, companies or trusts. Only individuals can have personal services income.

Firstly, you may explore the personal services income tests and how they apply to you, there are:

1. Results Test
2. The 80% Rule
3. Unrelated Clients Test
4. The Employment Test
5. Business Premises Test

The Results Test

This is where you are paid via a contract or arrangement upon completion of that work. If you are paid on an hourly or daily rate, you fail the first results test as this means you are not being paid after the completion of the work, however on a rate which pays you for your time, as opposed to your skills which are needed to do the work, to then be paid on the completion of the work or services provided.

 The 80% Rule

The 80% rule is where 80% or more of your PSI is from one client (throughout the income year), you cannot decide for yourself of you meet the other tests. You must then get a personal services business determination from the Australian Taxation Office. You must do this or the PSI rules will apply.

 Unrelated Clients Test

Your services must be provided as a direct result of making offers to the public of your services.

 The Employment Test

There are a range of questions used to determine if you pass this test.

 Business Premises Test

Similar to the employment test, there are a range of questions used to determine if you pass the Business Premises Test. If you are to pass this test, you must answer yes to a set of questions which determine if you pass this test. Some examples of these questions include, at all times in the income year, were your business premises owned or leased by you, used for personal services work more than 50% of the time and physically separate from your residence and your associates’ residences. You must answer yes to all parts of the Business Premises Test to pass the test.

 Once you have worked out which personal services income test applies to you, you can begin to work towards a goal of moving out of the personal services income regime. It is important to note if your business is structured in a company or trust, any personal services income derived by your business will drastically affect your ability to implement tax planning strategies. Taxation is complex, so when in doubt, it is strongly suggested to invest in quality accounting services. GMD Accounting have the expertise to help guide you in your business and can answer your queries regarding the Personal Services Income and how it affects your affairs. We work with our clients to provide a premium accounting service and have assisted many clients with Personal Services Income queries.

 Want to learn more?

Talk to one of our accountants at GMD about achieving the goal of moving your business away from generating personal services income and towards deriving business income. This means you have the capacity to grow your business through increased clients, and have the resources to employ other people to perform principle work, allowing you to profit off other peoples labour, and adopting business risk.