Am I deriving Personal Services Income?

For those in the business of selling a services that is attributable to your personal skills, knowledge and time, it is more than likely that you are earning Personal Services Income. There are special tax rules that may apply to your circumstances. 

What is Personal Services Income?

Personal Services Income is that income received mainly for an individual's personal efforts or skills. Personal Services Income is only relevant to individual, but it can be earned through an interposed entity referred to as a Personal Services Entity.

For income to be considered 'Personal Services Income' more than 50% of the income received needs to be a result of the individual's personal skills and efforts rather than through the use of assets, sale of goods or by a business structure. 

It should be noted that even thought your personal skills and efforts may be required to produce an item for sale (like an artwork), the income received from the sale of the item is not considered Personal Services Income. 

Further, an established business structure which includes substantial income-producing assets and/or other employees is not considered a Personal Services Entity. However, where services are performed through an entity that is not an individual does not automatically mean there is a business structure for the purposes of Personal Services Income rules. 

Why is Personal Services Income relevant?

Where Personal Services Income apply, income will be attributed to the individual for income tax purposes. This means that income cannot be 'split' amongst other family member shareholders if you use a company or distributed to other beneficiaries if you use a trust.

There are specific deductions that are allowed to be claimed against Personal Services Income, some of which include:

• Advertising, tender and quote costs
• Registration and licensing fees
• Account-keeping fees, including bank fees
• Some insurance costs, including public liability and professional indemnity insurance fees
• Salary or wages and super contributions for an employee engaged at arm's length (not an associate)
• Reasonable amounts paid to an associate principally for their work
• A portion of home office expenses, such as heating, lighting, phone and internet (Occupancy costs like rent, mortgage interest, rates or land tax cannot be claimed)

What is a Personal Services Entity?

A Personal Services Entity is a company, partnership or trust who ordinary income or statutory income includes the Personal Services Income of one or more individuals. 

Where the Personal Services Income rules apply to a Personal Services Entity, the following may apply to:

• Restrict the types of deduction that can be claimed
• Attribute the Personal Services Income received by the Personal Services Entity to the individual (after deductions), and
• Give the Personal Services Entity PAYG withholding obligations regarding that individual, even if the individual is not an employee as such of the Personal Services Entity. 

What is a Personal Services Business?

A Personal Services Entity can test to see if it meets the Personal Services Business exclusionary requirements by looking at the following two tests:

1. Results Test

2. 80% test

You meet the Results Test  if you satisfy the following tests, making you a Personal Services Business if you are:

• Paid to produce a specific result
• Required to provide plant, equipment or tools
• Required to rectify mistakes at your own costs

If you fail the Results test and receive less than 80%  of your income from a single client, this makes you a Personal Services business.

If you fail the Results test and receive more than 80% of your income from a single client, then you may still be a Personal Services Business if you satisfy one of the following tests:

1. Unrelated clients test

2. Employment test

3. Business premises test

Where none of the exclusionary tests are met, a Personal Services Entity can still apply for a Personal Services Business Determination. Where the entity does not meet the 80% test, obtaining a Personal Services Business Determination may remove your need to comply with the adverse rules. 

How can Tax Controversy Partners help you?

Navigating the Personal Services legislation and determining if your entity is a Personal Services Business can be extremely difficult to navigate. At Tax Controversy Partners, our experienced lawyers can advise you on these tests, in managing your compliance requirements under the Personal Services Income rules and assist you in preparing a Personal Services Business Determination where appropriate. Please contact us using our online contact form, via email at admin@taxcontroversypartners.com.au or by phone at 02 8513 3813.