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Personal services income for small business

A recent focus of audit compliance for the ATO is in the area of personal services income (PSI). For those of you who may not be aware income that is deemed to be PSI is any income that is earned as a reward for an individual’s personal efforts and/or skills. If your income is from the buying and selling of goods or generated from the use of an asset (such as a rental property or piece of machinery) then you will be excluded from the PSI rules.

If you believe that your income may be deemed as PSI then there are four tests the ATO has put in place to determine if you are a PSI earner or not. These tests are the results test, unrelated clients test, employment test and business premises test. If you fail to meet the criteria of any of these tests then the tax office will determine that your income is personal services income. Once that has been established, you will need to take great care with what you claim as tax deductible expenses as the rules are quite specific here. Recent audits have highlighted that most small business people still do not understand the PSI rules, a scenario that can only spell trouble for a small business person. The ATO website has plenty of useful information on this area and it is imperative that you, as a small business operator, are up to speed in this very specific, but poorly known about, area of Australian income tax law. Whether you're based in Sydney, or anywhere in Australia, it's a good idea to take time to chat to your small business accounting expert about such issues.