PSI is income produced mainly from your personal skills or efforts as an individual. Working as a consultant for other firms or organisations would be Personal Services Income. There are special tax rules ensuring you cannot reduce your income tax by diverting income received from your personal services through companies, partnerships, or trusts.
To pass the results test in an income year, you need to meet the following three conditions:
Paid to produce a specific result
Required to provide the equipment or tools
Required to fix mistakes at your own costs
If you pass the test, your business is a personal services business (PSB) for that income year and the PSI rules don’t apply. If you don’t pass the above, you need to pass the 80% test and at least one of the remaining tests;
Please note: If you’re paid by a labor-hire firm, the labor-hire firm is treated as your client.
This test is about if you generate 80% or more of your business income from one client (including client associates).
If you don’t pass the above, you need to pass the remaining tests.
Unrelated clients test- PSI income is produced from 2 or more unrelated clients.
Employment test – to employ others to assists with your principal work
Business premises test – you have business premises that need certain criteria.
What are the PSI rules?
The PSI rule will limit your deduction and will prevent you from claiming certain expenses e.g. payment to spouse and mortgage payment. And if carrying on the business via company its taxable income will be attributed to you as an individual.