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Irina Hollander & Associates Pty Ltd Chartered Accounts

When your income is PSI (“Personal Services Income”) and what can be done?

 

There has been plenty of confusion over the years about when income constitutes PSI and when it does not, even among the tax professionals.

The Commissioner of Taxation says that if the majority (more than 50%) of your income is for the skills, knowledge, expertise or efforts of the person who performed the services, this income will be classified as PSI.

PSI income is taxed in the hands of individual performing the services, regardless of whether the income is invoiced via a trust or a company. Deductions are limited to the range of deductions available to an employee. Rate of tax is the individual marginal rate of tax, i.e. up to 46.5%

Most of small business sole traders would be generating PSB (“Personal Services Business”) income, which is an extension of PSI. PSB income earners enjoy a wider range of deductions that would be available to a business, though the net income is still taxed in the hands of the sole trader. Rate of tax is the individual marginal rate of tax, i.e. up to 46.5%

What can be done to improve personal tax position of a business operator?

Following the logic of the tax legislation, all sole traders should strive towards growing their businesses to enjoy the benefits of the “Business Structure” type of income. This is when the number of non-principal material fee earners exceeds the number of material fee earners, who are principals. The premises, the acquired goodwill, the tools and machinery used to produce this income are all taken into consideration. Once the income generated can be deemed Business Structure Income, it can be tax-effectively streamed to lower tax bracket family members and family holding companies and taxed at 0%-30% rates of tax.

For further information please contact Irina Hollander CA.

Disclaimer

The information provided above is of a general nature only and should not be relied upon as a substitute for specific professional advice.