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What is PSI, does it affect me?

This article is written by our WFS Melbourne Director, Tax Accountant and Mortgage Broker – Abby Morphett.

You’ve heard the term PSI, but you’re unsure whether it applies to you or what it actually is?

In a nutshell, PSI or Personal Services Income is income you derived from your personal efforts and skills.

An example would be IT Consultants and plumbers. An example of what is not PSI is someone who sells goods.

If you provide personal services but you have decided to structure your business as a company for the tax benefits, the ATO has a number of test you have to satisfy in order to be able to take advantage of this structure.

This is where is can get a bit tricky.

Structuring your business as a company might seem like the best way to go so you pay less tax at the small business tax rate where the personal tax rate could be up to 46.5%. 

An example of this is if you derived $200,000 income as an employee you pay $64,667.00 in marginal tax* and as a company you pay $55,000.00 in tax*.

But if the PSI rules apply, you would be treated as an employee in the eyes of the ATO, company or not.

Meaning you pay the higher tax rate (if applicable) and you are unable to benefit from the deductions (such as; immediate write off).

However, there are some tests that the ATO recognizes that enables you to take advantage of the different business structures.

Results Test

The results test is where 75% of your income comes from producing a result, with your own equipment or tools and you are responsible for rectifying any defect in your work.

What does a “result” mean?

If you were an IT Contractor and the government gave you a contract to complete a “job” for a set rate. Such as; designing a new security system for internal processors for $150,000K – that would be your result.

If you are on a pay by the hour contract you likely won’t satisfy this test, even if you are working towards a result and you still need to satisfy the remaining 25%.

The 80% Rule    

If 80% of your income comes from one client, you will not satisfy this test, and the PSI rules apply (meaning you can’t take advantage of the company tax rate or immediate write off).

Therefore, even if you work for a labour hire company you will not pass this test.

If you satisfy this rule, there are additional rules to check the unrelated clients test, the employment test, and the business premises test.

These rules can be somewhat confusing, and the best option is to talk to your accountant.

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