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:
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;
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:
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 –
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:
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.