Personal services income and your tax

Learn about the impact of Personal Services Income (PSI) on your tax return and deductions. Find out how to determine if your business qualifies as a Personal Services Business (PSB), claim deductions, and report your PSI based on your business structure.

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.

Visit the ATO website or speak with trusted tax advisers like the team at Paris Financial to find out more.


Source: ATO Newsroom

Share On:

Other News

All the latest from our small business tax champions.

Why you landed here

Phillip Anthony Partners joins Paris Financial East Melbourne

We are pleased to share that the team at Phillip Anthony Partners have merged with Paris Financial. Our team at Paris Financial can provide you with a large range of quality financial services with over 65 people located across two convenient locations in Blackburn and East Melbourne.

Paris Financial shares the same philosophy as Phillip Anthony Partners of providing a value focused and high quality service for each of our clients. We look forward to assisting with your accounting needs.