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Understanding All the Basics of Personal Service Income

02/03/2023 by
The Marketing Team
Do you own a service operating business? If yes, then this Business Kitz blog post is for you! PSI, also known as Personal Services Income, can play a huge role in service businesses. In this blog post, we are going to go through what PSI is and how it may apply to your business. What […]

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Do you own a service operating business? If yes, then this Business Kitz blog post is for you! PSI, also known as Personal Services Income, can play a huge role in service businesses. In this blog post, we are going to go through what PSI is and how it may apply to your business.

What is Personal Service Income (PSI) Tax?

PSI tax, also known as Personal Services Income tax, is a tax applied to income earnt by individuals who provide personal services directly to their clients. It is designed to prevent high-income earners from reducing their tax liability by setting up a personal services entity. The PSI tax applies to individuals who receive income from providing their own skills, knowledge, or expertise to clients in a manner that is classified as a personal service.

However, before going into the set of rules, it is important to know whether any of your income may be classified as PSI.

Receiving Personal Service Income (PSI) Tax

To assess whether your income comes under PSI, you need to consider whether the income is generated primarily from your personal skills, knowledge or expertise. Factors to consider include the level of control over the work, whether you can delegate tasks, and the degree of autonomy in the business.

To determine if you have received PSI tax, you need to meet certain criteria. Firstly, the income must be earned from personal services you provided, and the payment must have been made directly to you. Secondly, you must not have created a separate legal entity, such as a company, to provide your services. If you meet these criteria, then you may have received PSI tax, and it is important to speak to a tax professional to understand your obligations and responsibilities.

If you have not received any PSI tax, you may not be required to pay PSI tax or there may have been a delay or error in the delivery of the tax notice. However, failure to pay PSI tax when required may result in penalties, interest, and legal action.

Is my business a personal service business (PSB)?

If a business is classified as a Personal Services Business (PSB), it will have different tax rules and regulations than other types of businesses. PSBs are typically service-based companies where the work is performed by an individual rather than a team or group. PSBs may also be subject to additional taxes, such as the Personal Services Business Income (PSBI) tax, which is applied to any income earned by the corporation. These rules are in place to prevent individuals from using corporations to reduce their personal tax liability by claiming business expenses as deductions.

PSI

PSI refers to personal services income and is subject to certain tax rules.

  • the Results Test requires that income is paid for a specific result, equipment and tools are provided, and mistakes are fixed at the worker's expense.
  • the 80% Rule applies if 80% or more of the income is from one client,
  • the Remaining Tests assess if the business is a personal services business exempt from PSI rules.

Received PSI and the rules do apply

Receiving PSI (Personal Services Income) can be taxable under certain conditions, even if you are a sole trader or contractor. The rules state that if more than 50% of your income is generated from providing personal services, you may be required to pay PSI tax. We recommend that you seek professional advice to determine what your obligations are specifically.

Legal Advice

We know owning a business can be tricky and tedious, but we are here to help! To ensure you have all the correct policies in place, check out our full library of templates available via our Business Kitz Subscription. If you have any questions around the legalities of policy making, please do not hesitate to contact our sister company Legal Kitz. You can contact us by phone on 1300 988 954 or email us at info@legalkitz.com.au. We also provide a FREE 30 minute Consultation to set you in the right legal direction.

About
The Marketing Team
Business Kitz Marketing team are experts in their field. You can expect the best business guides and updates on employment law here.

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