It is pretty common for people to structure their professional activity by creating an entity to manage their business. It can be a trust, a partnership, or, more often, a business.
The small business tax rate is only 26%, which is comparable to the personal tax rate of 45%. Also, companies can claim a wider range of tax deductions and are free to distribute franchise dividends to shareholders (or, failing that, to withhold company profits).
Personal Service Income (PSI) is primarily a reward for a person's efforts or skills.
There are special tax rules regarding PSI to improve the integrity and fairness of the tax system. They prevent people from reducing or deferring income tax by diverting the income they receive from their services through corporations, partnerships, or trust funds.
You can earn PSI in almost any industry, business, or profession. However, a few common examples include:
Finance professionals
IT consultants
Engineers
Masonry
Practicing doctors.
PSI doesn't care if you are an employee who only receives wages and salaries. But if you are carrying out your operations through an entity, such as a corporation, partnership, or trust, and you are an employee of that entity, the PSI rules may still apply.
Income is classified as PSI when more than 50% of the income you receive is a reward for your efforts and skills rather than generated through the use of resources, the sale of a property, or a business facility.
You will need to find out if any part of your income is classified as PSI. If so, you need to know if the PSI rules apply to this recipe. There are various steps you can take to help you do this.
If the PSI rules apply, they will affect how PSI notifies us and what deductions you can claim.
If the PSI rules do not apply, your business is a Personal Services Business (PSB). When you are a PSB, there is no change to your tax obligations except that you must report any PSI on your tax return.
You can receive PSI even if you are not an individual trader. If you are filing PSI through a corporation, partnership, or trust fund and the PSI rules apply, your income will be treated as personal income for tax purposes.
Who Is Affected By This?
The measures apply to businesses, funds, and partnerships in which the entity's income is derived primarily from a person's efforts or abilities.
The rules do not apply to recipes which are mainly:
Supply or sales of goods (for example, at retail, wholesale or in manufacture), or
Generated from an income-generating asset (such as an excavator) or
Grants the right to use the property (for example, the copyright in a computer program) or
Generated by a corporate structure (e.g., an accountant working for a large audit firm).
How Do The Rules Work?
Let's start at the beginning: these rules are complex! Given the extent of the rules to attract the activities of many professionals and the difficulty of exercising many people if they are caught in the act, it is essential to seek guidance from a professional.
If you receive income primarily as a reward for your efforts or skills, it may be (PSI) compliant.
To be exempt from the rules, you must be a personal service business (PSB).
You qualify as a PSB if:
You meet the test results
Less than 80% of your service income in an income year comes from a client, and you complete one of the other three personal service business tests (the independent client test, the employment test, or commercial facilities).
Obtain a ruling from the ATO confirming that it is a personal services business.
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