Appendix 8: Personal services income

What is personal services income?

Personal services income (PSI) is income that is mainly a reward for an individual’s personal efforts or skills. If PSI is received by a company (a personal services entity) it is still the individual’s PSI for income tax purposes.

The PSI rules don't affect PSI received by employees, except when the individual is an employee of a personal services entity who is providing services to a service acquirer and none of the personal service business tests are met in respect of that individual's PSI. The rules also don't apply to PSI that is earned in the course of conducting a PSB.

What is a personal services business?

You qualify as a PSB if, in respect of each individual whose PSI is included in your income:

you meet the results test
less than 80% of the individual’s PSI in an income year comes from each client (and their associates) and you meet either the unrelated clients test, the employment test or the business premises test, or
you obtain a determination from the Commissioner of Taxation confirming that you are a PSB.

What if you do not qualify as a personal services business and the PSI rules apply?

Generally, if the rules apply to you there are 3 main effects:

The PSI, reduced by certain deductions to which the personal services entity is entitled, is treated as the income of the individual who does the personal services work and must be included on their income tax return.
The personal services entity must either
- pay the PSI promptly, as salary or wages, to the individual who generated the PSI
- attribute the net PSI to the individual who generated the PSI and withhold and remit tax on that income.
The deductions that may be claimed are limited.

If the personal services entity has made a net PSI loss:

the net PSI loss must be transferred to the individual, the company can't use this loss against any other income, or carry forward the loss
the individual can claim this loss as a deduction in their individual tax return – if they don't have enough other income in that year to offset the loss, the individual may carry this loss forward under the carried forward loss rules.

Deductions limited when PSI rules apply

The deductions that may be limited include the following:

Certain car expenses
Superannuation contributions
Entity maintenance deductions
Rent, mortgage interest, rates and land tax
Payments to associates.

Certain car expenses

You may deduct:

a car expense for each car used solely for business purposes
a car expense or an amount of fringe benefits tax payable for a car fringe benefit where a car is used partly for private purposes.
However, there can't be, at the same time, more than one car for which such deductions can arise in gaining or producing the same individual’s PSI. If there is more than one car used privately at the same time for the same individual, you must choose one car only for which to claim deductions. The choice remains in effect until you cease to hold that car.

Superannuation contributions

You may claim a deduction for a portion of the contributions that you make to a complying superannuation fund or retirement savings account (RSA) for the purpose of making provision for superannuation benefits for an individual whose PSI you derive.

However, your deduction can't exceed the amount you would have to contribute to ensure you did not have an individual superannuation guarantee shortfall for that associate, if the individual:

performs less than 20% of your principal work, and
is an associate of another individual whose PSI you derive.

If the associate only performs non-principal work, you can't claim any deduction relating to PSI for contributions you make to a complying superannuation fund or RSA for the associate.

Entity maintenance deductions

These are:

fees or charges associated with an account with an authorised deposit-taking institution (but not including interest or interest-like amounts)
tax-related expenses
any expense incurred in preparing or lodging a document under Corporations Law, except if the payment is made to an associate
certain statutory fees.

Entity maintenance deductions must first be offset against your other income. If the entity maintenance deductions exceed your other income, the excess of the entity maintenance deductions may reduce PSI attributable to the individuals.

If your income includes the PSI of more than one individual, apportion the excess entity maintenance deductions between the individuals using the following formula:

Excess entity maintenance deductions multiplied by (individual's PSI divided by total PSI).

Rent, mortgage interest, rates and land tax

You can't deduct amounts that are incurred in gaining or producing an individual’s PSI if such amounts represent rent, mortgage interest, rates and land tax for the residence of the individual or the residence of an associate of yours or the individual.

Payments to associates

You can't deduct payments to associates or any amount you incur from an obligation you have to your associate to the extent the payment or obligation relates to the associate performing non-principal work.

Additional PAYG withholding obligations

When the PSI rules apply, you will have additional pay as you go (PAYG) obligations for the amount attributed (treated as belonging) to each individual who generated the PSI.

The additional PAYG withholding obligation ensures:

an amount of withholding has been reported and paid to us for the attributed income (the income treated as belonging to the individual who generated the PSI)
each individual who generated PSI receives a PAYG withholding credit for their income tax return.

Normal PAYG withholding applies to the PSI you received that is promptly paid out to the individual as salary or wages.

An individual receiving such salary or wages must complete item 1 Salary or wages in their individual tax return.

If you have a net PSI loss for an income year, there are no additional PAYG withholding obligations as no income has been attributed.

Treatment of attributed PSI on your income tax return

If PSI is attributed to an individual, the income is not assessable to the company. Include the PSI on the company tax return as follows:

Include the attributed amount at item 7 – label Q Other income not included in assessable income, as calculated in Worksheet 2 other reconciliation items.

The following example will help you complete the PSI details on the company tax return. The entity in the example is not conducting a PSB.

Example 21: attributed PSI treatment

Some salary or wages have been promptly paid, and some PSI is attributed to an individual because it has not been promptly paid as salary or wages.

A company derives income that is the PSI of a director.

Part of the PSI has been promptly paid as salary within 14 days of the end of the relevant PAYG withholding period. The company’s profit and loss statement is as follows:

Income (all PSI of the director) of $100,000
Less (minus) expenses
- Salary of $30,000
- Rent for director’s home that is a place of business of $5,000
- Other expenses (all deductible) of $25,000
- Total expenses of $60,000
Net profit is $40,000.

The rent paid for the director’s home used as a place of business is not deductible under the alienation of PSI provisions. The net profit is PSI of the director and is attributed to the director for income tax purposes (together with the amount representing non-deductible rent expense).

Income information
Income	Label	Amount
Other gross income	6R	$100,000
Total income	6S	$100,000

Expense information
Expense	Label	Amount
Rent expenses	6H	$5,000
All other expenses	6S	$55,000
Total expenses	6Q	$60,000

Total profit or loss
Calculation	Label	Amount
(subtract Total expenses from Total income)	6T	$40,000

Complete item 14 Personal services income as follows:

Write the amount of income you included at label 6R at label 14A. Write the amount of expenses you included at label 6Q at label 14B.

Profit or loss
Profit or loss information	Label	Amount
Total profit or loss amount	6T	$40,000
Add Non-deductible expenses (rent)	7W	$5,000
Subtotal	-	$45,000
Less Other income not included in assessable income	7Q	$45,000
Subtraction items subtotal	-	$45,000
Taxable income or loss	T	$0

End of example

Treatment of net PSI loss on your income tax return

The net PSI loss is transferred to the individual who generated the PSI. The company can't use this loss against any other business income or carry forward the loss. The total amount of the deductions to which the company is entitled is reduced by that amount.

Include the net PSI loss amounts at item 7 – label W Non-deductible expenses as calculated in Worksheet 2 other reconciliation items.

The following example will help you complete the PSI details on the company tax return. The entity in the example is not conducting a PSB.

Example 22: company tax return (net PSI loss)

Part of the PSI has been promptly paid as salary within 14 days of the end of the relevant PAYG withholding period.

The company’s profit and loss statement is as follows:

Income (all PSI of the director) = $75,000
Less (minus) expenses
- Salary of $40,000
- Salary for director’s son (non-principal work) is $10,000
- Other expenses (all deductible) of $40,000
Total expenses of $90,000
Net profit (loss) is ($15,000).

The salary paid to the director’s son for non-principal work is not deductible under the alienation of PSI provisions. In the calculation of net PSI the amount of $10,000 is non-deductible. The director is entitled to a deduction for the amount of the net PSI loss of $5,000. The deduction to which the company is entitled is reduced by this amount and the non-deductible amount.

The information is entered at the following labels.

Income information
Income	Label	Amount
Other gross income	6R	$75,000
Total income	6S	$75,000

Expense information
Expense	Label	Amount
All other expenses	6S	$90,000
Total expenses	6Q	$90,000

Total profit or loss
Calculation	Label	Amount
(subtract Total expenses from Total income)	6T	$15,000/L

Item 7 Reconciliation to taxable income or loss is then completed as follows:

Profit or loss
Profit or loss information	Label	Amount
Total profit or loss amount	6T	$15,000/L
Add Non-deductible expenses (salary paid to director’s son and reduction in total deductions for the net PSI loss that director is entitled to claim)	7W	$15,000
Subtotal	-	$0
Less Other income not included in assessable income	7Q	$0
Subtraction items subtotal	-	$0
Taxable income or loss	T	$0