Rules on Personal Service Income
Central to the application of the PSI rules is whether the relevant income derived by the individual or personal service entity (‘PSE’), is PSI, which is defined in S.84-5 as follows:
“…your ordinary or statutory income, or the ordinary or statutory income of any other entity is your personal services income if the income is mainly a reward for your personal effort and skills (or would be such a reward if it was your income).”
An individual or PSE will be considered to derive PSI where more than half of the income in question represents a reward for the personal efforts or skills of the individual.
PSI derived by an individual or PSE is unable to be split. This is because it will always be assessable to the individual who generated it (i.e., the individual will either be taxed directly, or in the case of a PSE, via attribution and/or the prompt payment of salary wages).
When will a taxpayer be carrying on a personal services business (‘PSB’)?
A key exception to the application of the PSI rules is where the individual or PSE deriving the PSI is conducting a PSB.
In the absence of a personal services business determination (‘PSBD’) from the Commissioner (discussed in future updates), a PSB is essentially an individual that derives PSI or a PSE (i.e., a company, trust or partnership whose income includes the PSI of one or more individuals), and passes either the results test (refer to S.87-18), or the 80/20 test (refer to S.87-15(3)) and either the unrelated clients test (refer to S.87-20), the employment test (refer to S.87-25), or the business premises test (refer to S.87-30).
Where an individual that derives PSI, or a PSE in unable to satisfy the requirements to be classified as a PSB, the PSI rules will apply. Where the PSI rules apply, income generated by the PSE cannot be split and generally only appropriate ‘employee-type’ deductions can be claimed by the individual or PSE in respect of the PSI.