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AJML Accountants Update – May 2017

Personal Services Income (PSI) -1

PSI implications

Where the PSI measures apply, they may limit the deductions that can be claimed by the sole trader.

All taxpayers are able to self-assess whether they are a personal services business (PSB) under the results test, and apply to the Commissioner for a PSB determination.

Identifying Personal Services Income (‘PSI’)

The personal services income (PSI) rules require a taxpayer to first identify if they are deriving personal services income. Section 84-5(1) provides that PSI is income which is mainly a reward for an individual’s personal effort and skills.

Examples of PSI may include the following:

  • Income of a professional person practicing on their own account without professional assistance

(e.g., a medical practitioner or an accountant in sole practice);

  • Income payable under a contract which is wholly or principally for the labour or services of a person (e.g., a bricklayer working as a contractor);
  • Income derived by a professional sports person or entertainer from the exercise of his or her professional skills; and
  • Income derived by consultants such as computer consultants or engineers from the exercise ofpersonal expertise.

However, income will not be regarded as PSI where it is derived from:

The use of assets which mainly generate the income of the individual (e.g., providing the use and operation of a crane or bulldozer for payment);

EXAMPLE – Income generated from use of assets not PSI

Mac owns and operates a semi-trailer. Mac has a contract with a large supermarket chain to transport goods throughout Australia. The semi-trailer is a substantial asset which is specifically suited to Mac’s transport business and is not suitable for private use. Based on market rates, the use of the semi-trailer represents substantially more than 50% of the contract price. Therefore, Mac’s income is derived mainly from the use of his semi-trailer and is not his PSI.

  • The sale of goods (e.g., selling goods via retailing, wholesaling or manufacturing) or the grant of a right to use goods (e.g., rights to a computer program for a license fee).
  • A business structure (e.g., a firm of accountants operating with a substantial number of professional staff, a distinct operational structure and reputable trading name).

Effectively, where a taxpayer derives income from the use of assets, from the sale of goods or from a business structure, the taxpayer is considered to be deriving business income and not income as a reward for their personal exertion (i.e., the individual is not deriving PSI).