Business or Personal? How your professional practice could be affected by PSI rules

If you’re starting a new business in professional practice—for example you’re a doctor, lawyer, architect, financial planner, mortgage broker or similar—be warned: the tax office’s new Personal Services Income (PSI) provisions could significantly affect your potential earnings.

What is Personal Services Income (PSI)?

The Australian Taxation Office (ATO) defines PSI as “income produced mainly from your personal skills or efforts as an individual”. So if more than 50% of the amount you received for a contract was for your labour, skills or expertise, that income will be classified as PSI.

And that’s true regardless of your business’ structure. Any PSI income you produce through a company, partnership or trust, may still be treated as your individual income for tax purposes.

So does having your income deemed to be PSI mean you pay more tax?

Compared to paying tax through a structure involving, for example, a company and trust, yes, usually having a portion of your business income deemed to be Personal Services Income will mean a higher tax rate for that income. You will also need to meet certain tax return obligations and the deductions you can claim for your business might be limited.

But note that only the portion of your income deemed to be PSI is affected.

What can be done? What concessions are available?

The ATO’s PSI provisions include a number of concessions:

  1. Classifying your business as a Personal Services Business (PSB) will allow you to:
    • claim additional expenses
    • potentially pay your spouse:
    • a market value salary (for work they perform in your business)
    • superannuation contributions.
  2. You may also be able to claim a concession if you use an associated entity to provide service arrangements for your business such as:
    • labour hire
    • recruitment
    • clerical
    • administrative and other services.
  3. Another option is to prove the income isn’t PSI at all, and is actually income of a business structure. However, you’ll need to seek professional advice as there are a substantial number of factors to consider. (We’ll be talking more about this option in our next blog post.)

What should you do now?

As you can see, these provisions could have a serious impact on your earning potential. So you need to know exactly where your business stands with regards to PSI.

You can find more information (including a tool to help you determine whether the PSI rules apply to your business) on the ATO’s website here.

But to find out how it could affect your business in particular, and what steps you can take to protect yourself, get in touch with us and we’ll step you through what can be done.

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