Personal Services Income

If your income is principally the reward for the provision of your personal services or skills, and you do not meet the criteria for supplying a “result” (see below), and you derive more than 80% of your income from one source, then you will be regarded as an employee of the payer, and will not be able to claim any tax deductions beyond those that an employee would be able to claim, and which certainly excludes wages paid to a partner/associate, car expenses traveling to and from work, and home office costs.

A “result” is akin to a finished product. If you are engaged to produce a report for a fixed fee, or to produce the design for a theatrical production for a fixed fee, then that is considered a result. On the other hand, if you are paid an hourly rate to undertake a task, that would not. A “result” has an identifiable item to be delivered, and will be accompanied by an obligation to fix any deficiencies in the “result” for no extra reward.

“One source” includes subsidiaries, or commonly owned entities. For example, a journalist client wrote articles for a number of magazines, none of which individually paid more than 80% of his total income, but collectively they did pay more than 80% of his total income. Because the magazines were under the masthead of the same publisher, the ATO took the position that he was an “employee”

This income is referred to as Personal Services Income (PSI).

If you derive no more than 80% of your income from any one source, you will not be considered to have earned PSI as long as

  • you have more than two unrelated clients (see above note re “one source”);
  • you have your own business premises (and that needs to be more than just a room at home), or
  • you have employees, who contribute to the income earning activity (your partner who does the books doesn’t count).

If you do not satisfy the 80% of income from one source test, but may meet one of the three tests above, then you may apply to the ATO for a personal services business determination but if you do not, or do not obtain a determination, then you will be considered to have earned PSI and will be taxed accordingly.

In some circumstances, an “employer” will require that they deal with you only on the basis that you are incorporated as a Pty Ltd company, and you will be in a position where you will be involuntarily conducting a PSI business. In that situation you simply ensure that you are taxed on all of the income (less deductions for work related expenses only) and the company ends the year with no taxable income.