Personal services income and your tax

Did you know that if more than half the income you receive from a contract is for your personal efforts or skills, it can affect how you complete your tax return and the deductions you can claim?

This income is called personal services income (PSI). You can earn it in almost any industry either directly as a sole trader or through another entity such as a company, partnership or trust.

To understand what you can and can’t claim, you (if you’re a sole trader), or the entity you’re earning PSI through, need to work out if you’re conducting a personal services business (PSB) by using the PSB tests.

If you establish that you’re conducting a PSB, you can claim the same business deductions you normally would in relation to your PSI. However, if you aren’t conducting a PSB, then PSI rules apply and will limit the deductions you can claim against your PSI. This means you can’t claim deductions for:

• rent, mortgage interest, rates and land tax
• payments made to associates (for example spouse, child or other relative) for administrative work, such as bookkeeping and answering phones
• expenses that you generally wouldn’t be able to claim if you were an employee.

For example, if you provide marketing services and employ your spouse to issue invoices and bank receipts, you can’t claim a deduction on the wages you pay them or the super contributions you make as their employer.

When completing your tax return, you need to report your PSI even if you’re a PSB and the PSI rules don’t apply to you. How you report your PSI will depend on whether you operate as a sole trader, company, partnership, or trust. In each case there are specific labels on your tax return that you need to complete.

Book a free consultation with our trusted tax and business adviser to find out more.

Source: ATO