Along with the increase in small business concessions over recent years the ATO has been very active in reviewing the tax treatment of businesses that derive income from personal services as well as
professional services firms. The ATO has recently signalled its clear intention to take a more aggressive approach to professional firms which fall outside the scope of the PSI rules with its recent website updates.
Personal services income (PSI) is income produced mainly from your personal skills or efforts as an individual. The personal services income (PSI) rules were introduced to prevent the shifting or splitting of income with other individuals or entities in an attempt to pay less tax.
Alienation of PSI
Alienation of PSI occurs when the services of an individual are provided through a business entity (company, partnership or trust) rather than directly by the individual who performs the services.
Alienation occurs when personal services income received is retained by the entity and/or diverted to associates, allowing a lower rate of tax to be paid on that income. The use of these arrangements is also used by some taxpayers to create an entitlement to a range of deductions which would not be available to an individual providing the same services as an employee. Such arrangements may attract the general anti-avoidance provisions (GAAP) https://www.ato.gov.au/business/personal-services-income/in-detail/rulings-and-law/general-anti-avoidance-rules-for-a-psb/?anchor=alienationofpsi#alienationofpsi
You can receive PSI in almost any industry, trade or profession. However, some common examples include financial professionals, information technology consultants, engineers, construction workers and medical practitioners. PSI does not affect you if you're an employee receiving only salaries and wages.
Income is classified as PSI when more than 50% of the amount you received for a contract was for your labour, skills or expertise.
The first thing you need to do is work out if any of your income is classified as PSI. If it is, you then need to work out if special tax rules (the PSI rules) apply to that income. There's a series of steps to follow to help you do this. We recommend you consult your WLM taxation advisor if you have any concerns in regards to these PSI rules.