The ATO defines Personal Services Income (PSI) as ... income produced mainly from your personal skills or efforts as an individual, and regardless of whether it comes from another entity (eg. trust/company).
This regime is in place to stop people become contractors to minimise their tax situation whilst essentially being employed by another company - eg payments under a contract which are for your labour via consultation based on personal expertise.
However the PSI rules do not apply if you can prove that the income you are earning is from a Personal Services Business (PSB). A PSB exists if:
- The “Results” test is satisfied, or
- Less than 80% of the PSI is from one sources plus 1 out of 3 additional tests is satisfied, or
- (unlikely) A PSB determination is obtained from the ATO Commissioner
What's the Results Test?
The Results test is a test that is met if all the following conditions are satisfied in relation to at least 75% of your PSI for that year:
- The income is for producing a result (ie you get paid on a successful outcome, not paid hours for just turning up), and
- You are required to supply the plant and equipment, or tools of trade (eg your own laptop), needed to perform the work to produce the result, and
- You are liable for the costs of rectifying any defects in the work performed.
As long are you met these 3 conditions you will pass the “Results” test, but fear not, if you don’t make it there is still hope for you via passing the 80% test!
What's the 80% test
The 80% test looks at your PSI related income to makes sure that its not all from one customer, if it isn’t, Great! An exemption can be granted from the PSI regime if you can satisfy any of the following tests:
- The unrelated client test (did you have more than 1 client or do any advertising to the public), or
- Employment test (did you have any employees or subcontractors who performed more than 20% of the work), or
- Business premises test (did you maintain an office outside your home?)