Overview
If your business operates as a company, partnership or trust, and the personal services income (PSI) rules apply: You need to attribute or treat any PSI received as belonging to each individual who produced the income.
If your business operates as a sole trader: You do not need to attribute PSI, as the income is already reported in your individual tax return.
Follow the 5 steps below to attribute PSI.
For more information about attributing PSI, see TR 2003/6 Income Tax: attribution of personal services income.
Step 1: Identify the amount of PSI received
Work out whether individuals working for your business have generated PSI, and if so, how much.
See Income that is PSI for more information about what income is PSI.
Step 2: Subtract any salary or wages
Subtract any salary or wages that has been promptly paid to each individual who produced the PSI.
Promptly paid means paying an amount by the 14th day after the relevant PAYG payment period during which the PSI was received by your business.
See PAYG when receiving PSI for more information.
Example: promptly paid
A business lodges activity statements quarterly, and that business receives PSI in the January to March quarter. In this case, promptly paid would mean the salary or wages were paid to the individual who performed the services by 14 April.
End of exampleStep 3: Consider any excess entity maintenance deductions
If your business earns other income that is not PSI, it needs to deduct the entity maintenance deductions from other income first, before subtracting any remaining amounts from the PSI.
Entity maintenance deductions are certain allowable deductions associated with running your business, for example:
- fees for opening, managing, or closing a bank account
- tax-related expenses.
When 2 or more individuals each generate the PSI, use the following formula to apportion any excess entity maintenance deductions between them:
Excess entity maintenance deductions × individual's PSI
Total PSI
See Claiming deductions when receiving PSI for more information about this step.
Example: allocating excess entity maintenance deductions
Jo and Jim are engineers who work through their company Jo and Jim's Engineering Services Pty Ltd. The business received $50,000 PSI ($20,000 for Jo's services and $30,000 for Jim's services). The business has $1,000 of excess entity maintenance deductions which would be allocated as follows:
|
Jo |
Jim |
|---|---|
|
$1,000 × $20,000 |
$1,000 × $30,000 |
|
= $400 entity maintenance deductions |
= $600 entity maintenance deductions |
Therefore, Jo is entitled to a $400 entity maintenance deduction, and Jim a $600 entity maintenance deduction.
End of exampleStep 4: Subtract any allowable deductions
If you work out that an expense your business incurred is an allowable deduction (including payments to associates for principal work), subtract this amount from the PSI you received.
Your business needs to work out the allowable deductions relating to each individual's PSI. The allowable deductions that relate to each individual should be subtracted from their PSI.
See Claiming deductions when receiving PSI for more information about this step.
Step 5: Attribute the net PSI
Positive net PSI
If there is a positive amount of PSI after completing all the previous steps, this amount will need to be attributed to the individual who produced that PSI.
Your business would give the individual a PAYG payment summary or income statement. The individual then needs to declare this amount in their individual tax return.
If you operate as a company, do not include the net PSI amount that has been allocated to the individual as assessable income in your company tax return. Instead, report the net PSI amount as a reconciliation item under Other income not included in assessable income in your company tax return. This avoids double taxation.
Partnerships and trusts include the net PSI amount as a reconciliation item, under Income reconciliation adjustments in the partnership or trust tax return.
Net PSI loss
If there is a negative amount of PSI (a loss) after completing all the previous steps, this net PSI loss must be transferred to the individual. Your business cannot use this loss against any other business income, or carry forward the loss.
The individual can claim this loss as a deduction in their individual tax return. If the individual does not have enough other income in that year to offset the loss, the individual may carry this loss forward under the carried forward loss rules.
Companies include the net PSI loss amount as a reconciliation item in the company tax return, under Non-deductible expenses. Partnerships and trusts include the net PSI loss amount as a reconciliation item, under Expense reconciliation adjustments in the partnership or trust tax return.
See Completing your tax return when earning PSI for more information about this step.
Example: attributing PSI where one individual generated the PSI
Sandi is an architect who works through her company Sandi's Architecture Services Pty Ltd. Sandi completes 2 contracts on behalf of Sandi's Architecture Services Pty Ltd, generating $40,000.
This $40,000 is PSI, and Sandi has also worked out that the PSI rules apply. In addition to the PSI, the company earned $2,000 in interest income.
Sandi's Architecture Services Pty Ltd:
- promptly paid $30,000 to Sandi as salary or wages
- incurred $20,000 in allowable deductions
- incurred $5,000 in entity maintenance deductions.
The attributed amount is worked out as follows:
- $40,000 PSI is received by the company
- $30,000 salary or wages promptly paid to Sandi
- $3,000 entity maintenance deductions remaining after offsetting them against the other income first (the $5,000 entity maintenance deductions is first offset against the $2,000 interest income, leaving $3,000)
- $20,000 allowable deductions
- −$13,000 (net PSI loss)
The income position of Sandi's Architecture Services Pty Ltd would be as follows:
|
PSI |
$40,000 |
|---|---|
|
PSI deductions |
$50,000 ($30,000 promptly paid salary or wages plus $20,000 PSI deductions) |
|
Other income |
$2,000 |
|
Entity maintenance deductions |
$5,000 |
|
Net PSI loss claimed by Sandi |
$13,000 |
|
The company has net taxable income of |
$0 ($2,000 other income less entity |
Sandi's Architecture Services Pty Ltd will need to:
- advise Sandi of her $13,000 net PSI loss (the company cannot use this loss)
- report this $13,000 net PSI loss as a reconciliation item, under Non-deductible expenses in the company tax return
- indicate the company's income includes an individual's PSI
- include Sandy's PSI amount of $40,000
- include the total amount of $53,000 deductions for PSI – the amount of $53,000 is calculated from the PSI deductions amount of $50,000 plus $3,000 of the entity maintenance deductions.
In her individual tax return, Sandi would declare:
- $13,000 net PSI loss and offset this against other income
- $30,000 salary or wages.
Example: attributing PSI where 2 individuals generate separate PSI
Jo and Jim are engineers who work through their company – Jo and Jim's Engineering Services Pty Ltd. Jo and Jim complete 2 separate contracts on behalf of Joe and Jim's Engineering Services, generating $100,000. Specifically:
- Jo's contract with Mega Mine Ltd generates $60,000
- Jim's contract with Mine Field Pty Ltd generates $40,000.
Both of these contracts are PSI, and Jo and Jim's Engineering Services has worked out that the PSI rules apply to both individuals.
Jo and Jim's Engineering Services Pty Ltd:
- promptly paid wages of $30,000 to Joe
- incurred $9,000 in allowable deductions in respect of Jo's PSI and $11,000 in respect of Jim's PSI
- did not incur any entity maintenance deductions.
Thus the attributed amount is worked out as follows:
|
Attributed amount calculation for Jo |
Attributed amount calculation for Jim |
|---|---|
|
$60,000 PSI |
$40,000 PSI |
|
−$9,000 deductions |
−$11,000 deductions |
|
−$30,000 salary or wages promptly paid to Joe |
|
|
$21,000 net PSI for Jo |
$29,000 net PSI for Jim |
Jo and Jim's Engineering Services Pty Ltd will need to:
- attribute $21,000 to Joe
- attribute $29,000 to Jim
- report this $50,000 as a reconciliation item, under Other income not included in assessable income in the company tax return.
Reporting the $50,000 as a reconciliation item does not mean the company pays tax on this income. It is simply a reporting method that shows income has been allocated to Jo and Jim. The company's taxable income is reduced accordingly.
Jo would declare the $21,000 attributed income and $30,000 salary or wages on his individual tax return and pay the relevant amount of tax on this income.
Jim would declare the $29,000 attributed income on his individual tax return and pay the relevant amount of tax on this income.
End of exampleCompleting reconciliation labels
Showing attributed income
Any PSI amounts you are required to attribute to individuals who generated the PSI is not your business’s assessable income. On the tax return, the business’s assessable income must be reduced by the total PSI attributed.
If you have worked out there is net PSI, you need to show this amount on your business tax return.
Company tax return
Once you have completed item 14 Personal services income:
- subtract the amount at label B from label A
- include the net amount at item 7 label Q.
Partnership or trust tax return
Once you have completed item 30 Personal services income:
- subtract the amount at label B from label A
- include the net amount at item 5 label A.
Make sure you include L in the box to the right of label A to reduce the assessable income of the partnership or trust.
Showing non-deductible expenses
Show any expenses that are not allowable deductions because of the PSI rules at either:
- item 7 label W on the company tax return
- item 5 label B on the partnership or trust tax return.
This includes the net PSI loss that each individual is entitled to claim as a deduction. The total amount of deductions the business can claim must be reduced by the total deductions that each individual can claim under the PSI rules.
Showing net PSI losses
When there is a net PSI loss, the individual can claim this loss as a deduction in their individual tax return.
Company tax return
Once you have completed item 14 Personal services income:
- subtract the amount at label B from label A
- include the loss amount with all other non-deductible expenses at item 7 label W.
Partnership or trust tax return
Once you have completed item 30 Personal services income:
- include the loss amount with all other non-deductible expenses at item 5 label B.
Your business cannot use a net PSI loss against any other business income or carry forward the loss. This net PSI loss must be transferred to the individual and deducted at item D15 Other deductions in their individual tax return.
PSI needs to be attributed if it is earnt through a company, partnership or trust and the PSI rules apply.