Overseas transactions or thin capitalisation – items 29 to 30

29. Overseas transactions

The following information will help you complete item 29 in the tax return:

• Overseas transactions
• Overseas expenses
• Transactions with specified countries

Overseas transactions

Was the aggregate amount of your transactions or dealings with international related parties (including the value of any property or service transferred, or the balance of any loans) greater than $2 million?

• No Print X in the No box at label W.
• Yes Print X in the Yes box at label W.

Did the thin capitalisation provisions affect you? (See Appendix 3 for more information.)

• No – Print X in the No box at label O.
• Yes – Print X in the Yes box at label O.

If you answered Yes at item 29 – label W or item 29 – label O, or you completed item 29 – label D or item 29 – label E, complete an International dealings schedule 2023

Print X in the Yes box at Have you attached any 'other attachments'? at the top of page 1 of the tax return.

Complete an International dealings schedule 2023 where:

• a tax return is required because the partnership had a period in 2022–23 when it was not a member of a consolidated group or MEC group (a non-membership period), and
• the partnership derived foreign income attributable to any non-membership period.

The aggregate amount of the partnership’s transactions or dealings is the total amount of all dealings, whether on revenue or capital account (including property transfers or service provision) and includes the balance of any loans or borrowings outstanding with international related parties. Transactions must not be netted off against each other, for example, a $600,000 purchase from, and a $700,000 sale to, related parties is treated as totalling $1,300,000, not $100,000.

International related parties may be persons who are not dealing wholly independently with one another in their cross-border commercial or financial relations and whose dealings or relations can be subject to Subdivision 815-B of the ITAA 1997 or the associated enterprises article of a relevant double tax agreement (DTA). The term includes:

• any overseas entity or person who participates directly or indirectly in the management, control or capital of the partnership
• any overseas entity or person in respect of which the partnership participated directly or indirectly in the management, control or capital
• any overseas entity or person in respect of which persons who participate directly or indirectly in its management, control or capital are the same persons who participate directly or indirectly in the management, control or capital of the partnership.

Participates includes a right of participation, the exercise of which is contingent on an agreed event occurring.

Person includes a company.

For more information on the relevant degree of participation, see IT 2514 Income tax: Company Schedule 25A: Information return for companies that transact business with related overseas entities.

The type of dealings or transactions which require you to complete International dealings schedule 2023 are dealings with:

• international related parties as above, such as an overseas holding company, overseas subsidiary, overseas branch or non-resident trust in which the entity has an interest
• unrelated parties where the conditions that operate between you and the unrelated party are different to the conditions that might be expected to operate between independent parties dealing wholly independently with one another in comparable circumstances.

These dealings or transactions may be the provision or receipt of goods or services, or transactions in which money or property has been sent out of Australia, or received in Australia from an overseas source during the income year. They may include the transfer of tangible or intangible property, provision or receipt of services, or the provision or receipt of loans or financial services. If money or property is not actually sent out of Australia or received in Australia, but accounting entries are made that have the effect of money or property being transferred, this is also to be taken as an international transaction.

Overseas expenses

Interest expenses overseas

Show at label D the amount of interest paid to non-residents. Include this amount at item 5 – label I.

If you include an amount at label D, you must complete an International dealings schedule 2023.

An amount of tax (withholding tax) is generally withheld from:

• interest paid (or payable) to non-residents, and
• interest derived by a resident through an overseas branch.

You must remit these amounts to us. You can't claim a deduction unless you have remitted any withholding tax to the Commissioner of Taxation. If you have withheld amounts from payments to non-residents, you may need to lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report.

Royalty expenses overseas

Show at label E the royalty expenses paid to non-residents during 2022–23.

If you include an amount at label E, complete an International dealings schedule 2023.

Include this amount at item 5 – label J, plus or minus any reconciliation adjustment for royalty expenses that you included at item 5 – label B Expense reconciliation adjustments.

An amount of tax (withholding tax) is generally withheld from royalties:

• paid or payable to non-residents, and
• derived by a resident through an overseas branch.

You must remit this amount to us. You can't claim a deduction unless you have remitted any withholding tax to the Commissioner. If you have withheld amounts from payments to non-residents, you may need to lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report.

Record keeping

Keep a record of the following:

• names and addresses of recipients
• amounts paid
• nature of the benefit derived, for example, a copy of the royalty agreement
• details of tax withheld where applicable, and the date on which it was remitted to us.

Transactions with specified countries

Did you send any funds or property to, or receive any funds or property from, any of the countries listed below? This includes sending or receiving funds or property indirectly, for example, through another entity or country.

Do you have the ability to control the disposition of any funds, property, investments, or any other assets located in any of the countries listed below? This includes:

• funds or assets that may be located elsewhere, but are controlled or managed from one of the countries listed below, and
• where you have an expectation that you are able to control the disposition of the funds or assets, or that you have the capacity to control the disposition indirectly, for example, through associates.

Print X in the Yes box for yes, or X in the No box for no at label C.

The specified countries are as follows:

• Andorra
• Anguilla
• Antigua and Barbuda
• Aruba
• Bahamas
• Bahrain
• Barbados
• Belize
• Bermuda
• British Virgin Islands
• Cayman Islands
• Cook Islands
• Curacao
• Cyprus
• Dominica
• Gibraltar
• Grenada
• Guernsey
• Hong Kong
• Ireland
• Isle of Man
• Jersey
• Liberia
• Liechtenstein
• Luxembourg
• Marshall Islands
• Mauritius
• Monaco
• Montserrat
• Nauru
• Netherlands
• Niue
• Panama
• Sint Maarten (Dutch part)
• Samoa
• San Marino
• Seychelles
• Singapore
• St Kitts & Nevis
• St Lucia
• St Vincent & the Grenadines
• Switzerland
• Turks & Caicos Islands
• US Virgin Islands
• Vanuatu

30. Personal services income

This following will help you to complete item 30 in the partnership tax return:

• Does your income include an individual’s personal services income?
• What is a personal services business?
• Unrelated clients test
• Employment test
• Business premises test
• Deductions limited to PSI

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).

• If more than 50% of the income received under a contract is for an individual's personal efforts or skills, then all income from that contract is PSI.
• If 50% or less of the income received under a contract is for an individual's personal efforts or skills, then none of the income for that contract is PSI.

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 mainly 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 contracting to provide 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.

Did the income of the partnership include an individual’s PSI?

• No – Print X in the No box at label N. You have now finished with this question.
• Yes – Print X in the Yes box at label N.

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

• 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 PSI rules.

A partner:

• cannot be an employee of a partnership
• cannot be paid salary and wages. See 44. 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 PSI loss.

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

Write at label 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 label 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 (PSB) in relation to an individual's PSI if, in respect of an 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 PSB determination from the Commissioner of Taxation confirming that you are a PSB.

A PSB determination confirms that an individual's PSI is included in the income of a PSB. Therefore, a partnership can be a PSB in relation to one individual's PSI and not in relation to another individual's PSI.

The results test

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

• Yes – Print X in the Yes box at label C.
• No – Print X in the No box at label 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:

• the PSI is paid to achieve a contractually specified 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 irrespective of how much income comes from one source.

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 can't self-assess whether you meet the other tests. The PSI rules apply to the PSI of the individual who generated it 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 PSB although you may apply for a PSB determination if you are unsure.

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

• Yes – Print X in the Yes box at label D.
• No – Print X in the No box at label 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 PSB 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 PSB tests.

Unrelated clients test

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

You meet the unrelated clients test in 2022–23 if:

• the individual doing the personal services work generated PSI from 2 or more clients who were not associated with each other, or with the individual, or with you, and
• the clients above were obtained 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 special conditions, you will pass the unrelated clients test if your services are provided to at least 2 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 label E2.

Subject to certain exceptions noted below, you met the employment test in 2022–23 if:

• you had employees, engaged subcontractors, or engaged entities that performed at least 20% (by market value) of the principal work, or
• you had one or more 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 of an individual who generated PSI and who you engaged to do principal work
• a partner who      
  • didn’t have their own PSI, and
  • performed principal work that helped generate the PSI of another individual.
   

You cannot count:

• companies, partnerships or trusts associated with you
• any other individual whose PSI you receive.

Business premises test

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

You met the business premises test if, at all times during 2022–23, you maintained and used business premises:

• that you used mainly for work to earn the PSI, that is, more than 50% of the activities you conducted at the premises were directed at producing your PSI
• that were used exclusively by you
• that were physically separate from the private residence of              
  • the individual doing the personal services work
  • their associates
  • your associates, and
   
• that were physically separate from the business premises of your clients or their associates.

‘At all times during 2022–23’ means the whole period during which you conducted activities to generate PSI.

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 PSB 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 3 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.
• You 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.

A partner:

• cannot be an employee of a partnership
• cannot be paid salary and wages. See 44. Total salary and wage expenses.

If you made a net PSI loss:

• the net PSI loss must be transferred to the individual who generated the PSI; The partnership cannot use this loss against any other business income, or carry forward the loss.
• the individual who generated the PSI 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.

Deductions limited to PSI

The deductions that may be limited include the following:

• Certain car expenses
• Superannuation contributions
• Entity maintenance deductions
• Mortgage interest, rates and land tax
• Payments to associates
• Additional PAYG withholding obligations
• Treatment of attributed PSI on your income tax return
• Treatment of net PSI loss on your income tax return

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 can't 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 can't 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 can't 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 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 of 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, 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 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 on their individual tax return.

A partner cannot:

• be an employee of a partnership
• be paid salary and wages. See 44. Total salary and wage expenses.

If your business has a net PSI loss for 2022–23, 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. Show the PSI on the Partnership tax return 2023 as follows.

Include the attributed amount in the amount you show at item 5 – label A Income reconciliation adjustments (as worked out in worksheet 1) in the Partnership tax return instructions 2023.

• The attributed amounts are income subtraction amounts.
• If these income subtraction amounts 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 label A on the tax return.

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

Treatment of net PSI loss on your income tax return

The net PSI loss must be transferred to the individual who generated the PSI. You 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.

Include the net PSI loss amounts in the amount shown at item 5 – label B Expense reconciliation adjustments, as calculated in worksheet 1.

For more information, see:

• Personal services income
• TR 2022/3 Income tax: personal services income and personal services businesses
• TR 2003/6 Income tax: attribution of personal services income
• TR 2003/10 Income tax: deductions that relate to personal services income

Continue to: Taxation of financial arrangements – items 31 and 32