Many contractors, consultants and health professionals set up a company or trust because they’ve been told it can be more tax effective.
And in many situations, it can be.
BUT, there’s a set of rules called Personal Services Income (PSI) that can change how that income is taxed, regardless of the structure you operate through.
In simple terms, PSI rules look at whether the income is mainly generated from your personal skills and effort, rather than from a business that operates independently of you. If the rules apply to you, the ATO may treat that income as your personal income, even if you are invoicing through a company or trust.
It’s something we occasionally notice when working with clients on their bookkeeping and BAS. It’s also one of those areas where it’s worth making sure the right advice has been considered because it can affect things like:
- Income splitting with family members
- Certain business deductions
- How the income is ultimately taxed
One of the key ways a business may fall outside the PSI rules is by passing what’s known as the Results Test.
The ATO generally looks for things such as:
- Being paid to achieve a specific result, rather than simply being paid hourly
- Providing your own tools and equipment to complete the work
- Being responsible for fixing defects if something goes wrong
If the results test isn’t met, other tests may apply - but as you can imagine, it can become quite technical, and small details can make a big difference.
The ATO also has helpful information explaining the PSI rules here:
Personal Services Income | Australian Taxation Office
If you operate as a contractor or consultant through a company or trust and haven’t discussed PSI before, it may simply be worth raising the question with your accountant.
Sometimes the answer is “all good”, and sometimes there are things worth reviewing.
Either way, it’s better to know.
Remember, small steps lead to big wins.
