The Alienation of Personal Services Income (PSI)
As from 1 July 2000 legislation was introduced to apply special rules to the situation where a person or entity earns personal services income. This typically applies to contractors and consultants whose work involves the personal effort or skill of an individual.
The general idea of the legislation is to limit the range of deductions able to be claimed against personal services income and to ensure that the whole of this net income is returned as the income of the person doing the work, even if work is performed via an interposed entity. For example you cannot perform personal services work via a company and engage a related party to do administration work or leave taxable income in the company to bear tax at 30%, unless you meet certain tests that place you outside the PSI rules.
The basic steps are:-
The Results Test. Are you paid to achieve a specified result? If tools are required, do you supply them? Are you liable for any defects? If you can answer yes to each of these questions the PSI rules do not apply. If you fail the results test you may still satisfy the remaining tests.
The 80% Rule. If one of your clients represents 80% or more of your personal services income you are brought within the PSI rules. If no one client represents 80% or more of your personal services income you still need to meet one of the following three tests.
Unrelated Clients Test. You must have 2 or more clients that have come to you as a direct result of making offers to the public. Clients that have come to you from a labour hire firm, placement agency or similar organisation do not count.
Employment Test. To satisfy this test you must engage employees or sub-contractors who perform at least 20% (by market value) of the principal work. You also pass this test if you have apprentices for at least half of the income year.
Business Premises. You must own or lease business premises that are used exclusively by you and are physically separate from your home and the business address of your clients or their associates.