30 Personal services income

Does your income include an individual’s personal services income?

Personal services income (PSI) is income that is mainly a reward for an individual’s personal efforts or skills (or would mainly be such a reward if it was derived by the individual).

A partnership may derive income which includes the PSI of one or more individuals. This includes individuals working through a partner that is a company or trust. Examples of PSI include income:

• for the services of a professional practitioner in a sole practice
• derived under a contract which is wholly or principally for the labour or services of an individual
• for the exercise of professional skills by a professional sportsperson or entertainer
• for the exercise of personal expertise by a consultant.

PSI does not include income that is mainly:

• for supplying or selling goods, for example, from retailing, wholesaling or manufacturing
• generated by an income-producing asset, for example, from operating a bulldozer
• for granting a right to use property, for example, the copyright to a computer program, or
• generated by a business structure, for example, a large accounting firm.

If the income of the partnership includes an individual’s PSI, print X in the Yes box at N, otherwise, print X in the No box at N.

If you answered no at N, you have now finished with this question.

If the partnership receives an individual’s PSI other than in the course of conducting a personal services business and, if the individual is not a partner, does not promptly pay it to the individual as salary and wages:

• the net amount of PSI is attributed to the individual and is not assessable to the partnership, and
• certain related expenses are not deductible under the special rules.

Note that a partner cannot be an employee of a partnership and cannot be paid salary and wages. See Total salary and wage expenses.

For purposes of item 30 Personal services income, 'you' or 'your' refers to the partnership.

Expenses specifically denied include rent, mortgage interest, rates and land tax for the residence of individuals (or their associates, such as a spouse) whose efforts or skills mainly generate the PSI for the partnership; the costs of a second private-use car; and payments of salary or wages and superannuation for associates to the extent such payments relate to non-principal work.

The denied expenses include the total amount of the deductions allowed to the individual for a net personal services income loss.

Include adjustments for PSI at item 5 Reconciliation items. See Treatment of attributed PSI on your income tax return.

Write at A the total amount of income gained by you during the year that is PSI of one or more individuals that you have included at item 5 income labels. Exclude any exempt or non-assessable non-exempt components of the PSI, for example, goods and services tax (GST).

Write at B the total amount of deductions against PSI included at item 5 expense labels.

What is a personal services business?

You qualify as a personal services business 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 one source and you meet either the unrelated clients test, the employment test or the business premises test (the 80% rule), or
• you obtain a determination from the Commissioner of Taxation confirming that you are a personal services business.

A personal services business determination relates to an individual whose personal services income is included in the income of a personal services business. Therefore, a personal services business may need to apply for multiple determinations where the personal services income of more than one individual is included in income of the personal services business.

The results test

Did you satisfy the results test in respect of any individual?

Yes Print X in the Yes box at C

No Print X in the No box at C

You will meet the results test in an income year if you have PSI from one or more individuals, and for at least 75% of the PSI of the individual doing the personal services work (having regard to the custom or work practice when work of that kind is performed):

• the PSI is paid to achieve a result under your contract or agreement
• you provide the tools or equipment necessary (if any) to do the work, and
• you are liable for the cost of rectifying defects in the work performed.

We consider that the PSI is paid to achieve a result when the individual is required to produce a specified result or outcome, and payment is conditional upon that result or outcome being achieved. The essence of the contract or agreement has to be to achieve a result, and not just to do the work as required.

You can self-assess whether you satisfy the results test.

What is the 80% rule?

If you don’t meet the results test, and 80% or more of the PSI in the income year comes from one entity (or one entity and their associates), you cannot self-assess whether you meet the other tests. The PSI rules apply to you unless you get a determination from the Commissioner.

When considering the 80% rule, do not take into account income that is not PSI, for example, investment income or income from the sale of goods or the use of an income-producing asset.

If you are a commission agent your PSI will be treated as coming from each customer provided you meet all of the following conditions:

• you are an agent of the principal but, not an employee
• you receive income from your principal for services that you provide to customers on the principal’s behalf
• at least 75% of that income is performance-based commissions or fees
• you actively seek other customers to whom you could provide services on the principal’s behalf, and
• you do not provide any services to the customers, on the principal’s behalf, using premises that the principal (or their associate) owns or has a leasehold interest in, unless you use the premises under an agreement entered into at arm’s length.

If you meet all of these conditions and, as a consequence, less than 80% of the PSI is treated as coming from each customer, you can self-assess against the unrelated clients test, the employment test and the business premises test. You do not need a determination from the Commissioner to be a personal services business although you may apply for a determination if you are unsure.

Personal services business (PSB) determination

Do you hold a PSB determination in respect of any individual?

Yes Print X in the Yes box at D

No Print X in the No box at D

You can go to Personal services business determination application to get a copy of the PSB determination application form and instructions. If you have earned PSI from more than one individual you can apply for a determination for each person.

Indicate for any individual for whom you did not satisfy the results test or hold a PSB determination, and each source of their PSI income yielded less than 80% of their total PSI, whether you satisfied any of the personal services business tests.

Unrelated clients test

If you satisfied the Unrelated clients test print X in the box at E1.

You will meet the unrelated clients test in the income year if the individual doing the personal services work generates PSI from two or more clients who are not associated with each other, or with the individual, or with you.

The personal services must also be provided as a direct result of the partnership making offers to the public, for example, by advertising. Do not count clients obtained as a result of registering your partnership name with a labour-hire firm, placement agency or similar organisation.

Separate government departments are deemed not to be associates of each other for the purposes of this test.

If you are a commission agent who meets all of the conditions for the special rules, you will pass the unrelated clients test if your services are provided to at least two customers as a direct result of your making offers or invitations to the public on behalf of your principal.

Employment test

If you satisfied the Employment test print X in the box at E2.

Subject to certain exceptions noted below, you will meet the employment test in the income year if you:

• have employees, engage subcontractors or engage entities that perform at least 20% (by market value) of the principal work, or
• have apprentices for at least half the income year.

‘Principal’ work is the main work that generates the PSI and does not usually include support work such as secretarial duties.

You can count a spouse or family member who does principal work, but not companies, partnerships or trusts associated with you.

If you are a partnership you can also count any partners who don’t have their own PSI and perform principal work that helps generate the PSI of another individual.

You cannot count any other individual whose PSI you receive.

Business premises test

If you satisfied the Business premises test print X in the box at E3.

You will meet the business premises test if, at all times during the income year, you maintain and use business premises that are:

• mainly used to conduct the work, that is, used for gaining or producing personal services income for more than 50% of the time
• used exclusively by you
• physically separate from the private residence of    
  • the individual doing the personal services work
  • their associates
  • your associates, and
   
• physically separate from the business address of your clients or their associates.

The phrase ‘at all times during the income year’ is taken to mean the whole period during which activities are conducted for the purposes of generating personal services income.

You do not need to maintain and use the same business premises throughout the year, but you must satisfy all the above criteria.

What if I do not qualify as a personal services business in respect of an individual whose PSI is included in my income, and the PSI rules apply?

Generally, if the rules apply to an individual whose PSI is included in your income, there are three main effects:

• The PSI, reduced by certain deductions to which the personal services entity is entitled, is treated as the income of the relevant individual 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 (other than a partner) who does the personal services work, or
  • attribute the net PSI to the individual who does the personal services work and withhold and remit tax on that income.
   
• The deductions that may be claimed are limited.

Note that a partner cannot be an employee of a partnership and cannot be paid salary and wages. See Total salary and wage expenses.

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

• the individual is entitled to a deduction for the loss, and
• the total amount of the deductions to which the entity is entitled is reduced by the amount of the individual’s deduction for the loss.

Deductions

The deductions that may be limited include the following:

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 in respect of employees (but not partners), for a car fringe benefit where a car is used partly for private purposes. However there cannot be, at the same time, more than one car for which such deductions can arise in relation to 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 be able to claim a deduction for a portion of the contributions you make to a complying superannuation fund or retirement savings account (RSA) for the purpose of making provision for superannuation benefits payable for your associate to the extent that their work for you relates to gaining or producing the PSI.

If you make such a contribution for your associate and their work forms part of the principal work for which you gain or produce the PSI, your deduction is limited. Your deduction cannot exceed the amount you would have to contribute for the associate to ensure that you did not have an individual superannuation guarantee shortfall for that associate.

If the associate only performs non-principal work, you cannot claim any deduction 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 relation to the preparation or lodgment of a document under Corporations Law, except if the payment is made to an associate
• 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:

Mortgage interest, rates and land tax

You cannot 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.

Payments to associates

You cannot 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, your business will have additional PAYG obligations for each individual with an amount of PSI attributed.

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 the PSI receives a PAYG withholding credit for their individual 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 on their individual tax return.

Note that a partner cannot be an employee of a partnership and cannot be paid salary and wages. See Total salary and wage expenses.

If your business has 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 partnership. Include the PSI on the partnership tax return as follows:

Include the attributed amount in the amount shown at A Income reconciliation adjustments item 5, as calculated in Worksheet 1: Reconciliation statement in the Partnership tax return instructions 2020. The attributed amounts are income subtraction amounts. If the income subtractions exceed the income add backs, the total is a negative amount. If the total is a negative amount, print L in the box at the right of A on the tax return.

The following example will help you complete the PSI details on your return. The entity in the example is not conducting a personal services business.

Treatment of net PSI loss on your income tax return

If an individual can deduct the net PSI loss, the total amount of the deductions to which the partnership is entitled is reduced by that amount. Include the PSI loss amounts on the partnership tax returns as follows:

Include the net PSI loss amounts in the amount shown at B Expense reconciliation adjustments item 5, as calculated in Worksheet 1: Reconciliation statement.

See also:

• Personal services income