Level 3, 276 Pitt St., Sydney NSW 2000 (02) 9264 9267 0414 292 368

AJML Accountants Update – November 2021

Home-based business – Part 8

Business vs private use

Your depreciation deduction is limited to the percentage your asset is used for business or other taxable purposes (for example, to manage your investments or rental properties). You cannot claim a deduction for the portion of the asset used for private purposes.

In determining whether the instant asset write-off applies, you must take into account the full cost of the asset, but your deduction is limited to an estimate of how much you use the asset in earning assessable income.

For example, if you buy a car for $19,000 and you estimate it is used 50% for business purposes and 50% for private purposes, it is immediately written-off, but your deduction is $9,500 immediately write off the cost of each asset that cost less than the instant asset write-off threshold amount

Asset sales and disposals

If an asset is part of the small business pool and you sell it (or it is lost or damaged and you receive a compensating insurance payout), the balance of the pool is reduced by the amount of the sale proceeds or insurance payout – to the extent the asset has been used and depreciated for taxable purposes.

If an asset has previously been written-off (either under the instant asset write-off or as part of a low value pool), the proceeds from the sale of the asset must be added to your assessable income – to the extent the asset has been used and depreciated for taxable purposes.

Personal services income

Personal services income (PSI) is income produced mainly from your personal skills or efforts as an individual.

There are special tax rules aimed at improving the integrity and equity in, the tax system. This is by ensuring you cannot reduce or defer your income tax by diverting income received from your personal services through companies, partnerships or trusts.

You can receive PSI in almost any industry, trade or profession. However, some common examples include:

  • financial professionals
  • information technology consultants
  • engineers
  • construction workers and medical practitioners.
  • PSI does not affect you if you’re an employee receiving only salaries and wages. But, if you are operating through an entity, such as a company, partnership or trust, and are an employee of that entity then the PSI rules may still apply.

Income is classified as PSI when more than 50% of the amount you received for a contract was for your labour, skills or expertise.

The first thing you need to do is work out if any of your income is classified as PSI. If it is, you then need to work out if the PSI rules apply to that income. There’s a series of steps to follow to help you do this.

  • If the PSI rules apply, they affect how you report your PSI to us and the deductions you can claim.
  • If the PSI rules don’t apply, your business is a personal services business (PSB). When you’re a PSB, there are no changes to your tax obligations, except that you need to declare any PSI on your tax return.
  • You can receive PSI even if you’re not a sole trader. If you’re producing PSI through a company, partnership or trust and the PSI rules apply, the income will be treated as your individual income for tax purposes.

When we say ‘you’ or ‘your business’, we mean you as a sole trader or the entity you operate through (whether that is a company, partnership or trust).