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What income is not personal services income?
Navigating the complexities of Personal Services Income (PSI) rules can be a daunting task. In this blog, we'll break down the key concepts and provide clear examples to help you grasp the essentials.
1. Salary and wage earners
If you receive only salary and wages as an employee, PSI rules generally don't apply to you. Exceptions arise when you indirectly earn PSI through another entity, like a company or partnership in which you're an employee.
2. Supplying or selling goods
Income generated mainly from supplying or selling goods is not considered PSI, and minor material usage within your services doesn't qualify as supplying goods. Let’s look at an example: Tam, a carpenter, designs and sells bespoke furniture through her partnership with Cho. Payments to the partnership are for furniture sales, not Tam's personal skills. Therefore, it's not PSI.
3. Supplying or using an income-producing asset
Income primarily generated by assets rather than personal skills is not PSI. This is likely if assets are essential, large-scale, high-value, or specified in contracts, contributing over 50% of the contract price. Let’s look at Jack’s story for clarity: Jack, an experienced backhoe operator, contracts with Jack & Jill Pty Ltd to dig trenches. The income is mainly from the backhoe and truck, making it non-PSI.
4. Income from a business structure
Income stemming from a business structure, rather than individual services, is not PSI. Factors include income-producing assets, the number of employees or contractors, the presence of goodwill, and the nature of activities.
For example, Bella is an electrician who operates a partnership with her spouse. The partnership has assets, employees, and goodwill. This income is not PSI.
PSI and your tax
When completing your tax return, you don’t need to worry about answering any PSI questions if this area doesn’t pertain to you. If you’re not sure, a tax agent can help!
Partnering with you for PSI understanding
If you're uncertain about your income classification, we can help you understand your position and the PSI rules that do or don’t apply to you. Understanding this is crucial for financial planning and compliance with tax regulations — to get started, contact us today.
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