So, you’re a contractor who runs your business through a company, partnership or trust to take advantage of tax opportunities, right?

Think you’ve got it sorted and there’s nothing to worry about? Hopefully, that is so.

The tax rate for small companies at just 27.5%, compares very favourably with the top personal tax rate of 45%.

Clearly this could be a very effective way of sheltering profits and for that reason, the ATO often seeks to apply what is known as the Personal Services Income (PSI) rules.

The impact of the PSI rules:

• income can be attributed back to the individual taxpayer
• the range of deductions available is limited to those typically available to individuals

In short, if you fall into the scope of the PSI rules, you may find the ATO “looking through” your business structure and taxing you as an individual.

Who is affected?

Almost any trade, industry or profession can receive PSI treatment. The most common are;

• Consultants
• Engineers
• Construction workers
• Professional sportsperson or entertainers
• Medical practitioners
• Dentist
• Architects
• Lawyers & Accountants

How do the rules work?

First things first; these rules are complex! If you receive income that is mainly a reward for your personal efforts or skills, you may fall within the PSI rules.

To be exempt from the rules, you need to be a personal services business (PSB).

You qualify as a PSB if:

• you meet the ‘results’ test or;
• less than 80 per cent of your income comes from one client and you meet one of the three personal services business tests (unrelated clients test, employment test or business premises test), or;
• you obtain a determination from the ATO

The ‘Results’ test

The primary test under the PSI rules is the ‘results’ test. An individual or their trading entity will be treated as a personal services business if they receive at least 75% of the personal services income for producing a result.

To pass the ‘results’ test –

• the contractor works to produce a result
• the contractor provides the tools and equipment necessary (if any) to produce the result; and
• the contractor is (or would be) liable for the cost of rectifying any defective work.

If an individual (or their trading entity) cannot satisfy the results test, there are three other tests available. The taxpayer can only consider these tests, if 80% or more of the taxpayer’s personal service income does not come from one source.

The three tests are:

1. The ‘Unrelated Clients’ test: To satisfy the ‘unrelated clients’ test, the individual or entity must provide services to 2 or more entities that are not associates of each other and are also not associates of the individual or entity.
2. The ‘Employment’ test: The ‘employment’ test will be satisfied if the individual engages one or more entities during the income year, and that entity, or those entities together perform at least 20% of the market value of the individual’s principal work for the year.
3. The ‘Business Premises’ test: The ‘business premises’ test is satisfied by either, an individual or personal service entity that, if at all times during the income year they maintain and use their own business premises.

What now?

Contact us at Accumulus for further guidance, particularly if you’re starting out or if you’re already in one of those professions and aren’t sure of your current structure.

Contact us on (03) 9377 4400 or email info@accumulusadvisory.com.au.