Are you aware that in the event where over fifty percent of your earnings from a contractual agreement derive from your personal efforts or skills, there may be alterations in both the approach to completing your tax return and the deductions available for claiming?
🟠Income predominantly more than 50% stemming from your individual skills or personal efforts is termed "personal services income" (PSI).
This income category is applicable across a wide spectrum of industries, encompassing potential earnings through direct means as a sole trader or indirectly through entities such as corporations, partnerships, or trusts.
To ascertain which expenses qualify for legitimate deductions, you, as a sole trader, or the entity channeling your PSI, must undergo an evaluation to determine if you're engaged in a "personal services business" (PSB) using the prescribed PSB tests.
In essence, PSI constitutes income primarily resulting from your expertise and labor. The assessment of whether your income falls under the PSI classification necessitates a meticulous examination of earnings tied to individual contracts or invoices.
🟠Moreover, it's essential to understand the following:
If over 50% of the income derived from a contract or invoice is attributed to your labor, skills, or expertise, the entire income qualifies as PSI.
Conversely, if 50% or less of the income from a contract or invoice pertains to your labor, skills, or expertise, none of it falls within the PSI category.
It's worth noting that specific forms of income, such as employee salaries and wages, remain unaffected by PSI regulations.
🟠Income not classified as PSI includes earnings from:
Selling or delivering completed goods, even if you were the creator.
Gains generated from income-producing assets, like renting out machinery or vehicles.
Profits derived from licensing your intellectual property, such as patents.
🟠When it comes to deductions, you cannot claim:
Expenses like rent, mortgage interest, rates, and land tax.
Payments made to associates (e.g., spouse or relatives) for administrative tasks, like bookkeeping and answering phones.
Expenses that would typically be ineligible for claims if you were an employee.
In summary,
When individuals earn income based on their personal skills or efforts, whether as sole traders or through intermediary entities, practitioners must accurately apply PSI rules and PSB tests annually for each relevant individual. This necessitates meticulous record-keeping for PSI calculations, evidence substantiating PSB operations, and retention of receipts for claimed deductions.
Regardless of PSI rule applicability, any PSI amounts should be reported in the appropriate sections of tax returns. Both clients and practitioners should be mindful that the Australian Taxation Office (ATO) may invoke Part IVA if there are indications that the primary purpose of an arrangement is to gain a tax advantage by redirecting, transferring, or distributing an individual's PSI or retaining profits within a PSB structure with lower tax implications.
Find out if you’ve earned PSI
Use the Australian Taxation Office (ATO) PSI decision tool
to work out if you’ve earned PSI.
🟠What steps to take if you've earned PSI:
Evaluate whether your income qualifies as PSI for each contract or job you've undertaken.
If it does, proceed to determine whether the PSI rules are applicable to that specific income.
🟠When PSI rules are applicable, they will impact:
The tax deductions you are eligible to claim for PSI-related expenses.
How you report your PSI on your financial records and tax returns.
It's important to note that all other income you earn remains subject to standard tax regulations.
Regarding deductions for PSI, you can claim expenses incurred in the process of earning this income.
🟠Some examples of deductions you can potentially claim include:
Costs associated with acquiring work, such as expenses related to advertising, tendering, and quoting.
Fees for registrations and licenses.
Account-keeping fees, including bank charges.
Certain insurance costs, such as fees for public liability and professional indemnity insurance.
Salaries or wages and superannuation contributions for employees engaged at arm's length (i.e., not associates).
Reasonable payments to associates for principal work.
A portion of home office expenses, including heating, lighting, phone, and internet costs. Please note that rent, mortgage interest, rates, and land taxes cannot be claimed as deductions.
Depending on the nature of your business and the specifics of your contracts, you may also be eligible for additional deductions.
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