Personal Services Income EXPLAINED
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- čas přidán 22. 06. 2024
- If you’re a contractor, consultant, or small business owner in Australia, then you would have heard of Personal Services Income, also known as PSI. But what is it?
This is an incredibly complex thing to understand, and determining whether PSI rules apply to your business or not will greatly affect how much you can save on tax. I’ve explained Personal Service Income to a lot of my clients many times in a simple and easy-to-understand way.
So in this video, I’ll explain everything you need to know about Personal Services Income.
CHAPTERS:
00:00 - Intro
00:24 - What is Personal Services Income?
01:00 - The PSI Rule Explained
02:38 - How to Apply the Personal Services Business Test
03:56 - Step 1: Have You Received PSI?
04:30 - Step 2: The Results Test
05:21 - Step 3: 80/20 Rule
05:55 - Step 4: The Remaining Test
06:56 - Case Study: Applying PSI Rules to a Trades Business
07:49 - Case Study: Applying PSI Rules to a Consulting Business
10:16 - What to do if you’re not sure about PSI
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Thank you for watching this video. I post weekly videos on this channel to provide the latest and most frequently asked business questions. Please take a second to say hi in the comments below. Also, if you enjoy my content and find it valuable, subscribe to the channel, like and share it with anyone who you think might find my channel useful.
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► Subscribe to my channel here:
/ daviemach
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Davie has over 14 years of experience in advising businesses in management accounting and taxation issues. He heads up a passionate team at Box Advisory Group who are dedicated to offering proactive and outstanding service to our clients.
Davie’s extensive experience in providing tax and consulting advice and astute business knowledge has paved the way for success for many businesses.
He is a member of the Chartered Accountants Australian and New Zealand, a member of the Australian Tax Practitioners Board and holds a Bachelor of Commerce degree from the University of New South Wales.
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Follow Me:
LinkedIn: / davie-mach
Instagram: / boxas_syd
Facebook: / boxadvisory
Website: boxas.com.au/
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DISCLAIMER: Please note that every effort has been made to ensure that the information provided in this video is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.
Can't believe how little views and followers you have !
your videos are extremely helpful and entertaining
Hey maybe in a few years i can say i was here so early in your career on CZcams 🙏🏻
Thank you for your kind words! I am so glad its entertaining. Haha, Accounting and Tax isnt the easiest to make "entertaining".
I really really appreciate this video. excellent topic and content.
I am working as a CyberSecurity contractor setting up my own pty ltd but I wouldn't have realized how it works before watching this video, especially when you explained 80/20 rule and result tests. Thanks mate.
Every year I go back to this video and cry happy tears because it helps so much. Thank you!!
thanks for watching :) haha
The BEST explanation I have come across. Why doesn't the tax office have people like you?
Glad you found it helpful!
Thank you so much for this! I really appreciate how clearly it has been explained as it is so confusing the way it is written
Glad it was helpful and totally agree that it is so confusing!
Very clear explanation. The case studies were very practical.
Mate you are a life saver!
I just started my own business as an engineering consultant and almost had a heart attack when I saw the tax rate for PSI!
Luckily I pass almost every single test.
Happy to help!
Very good explanations!
I’ve been struggling to understand PSI from a lot of readings . This is a very clear explanation to simplify the complex steps ! Thank you so much 😊
Thanks for watching :)
Very clear explanation and all these scenarios make total sense.
Thank you Davie! You are the best xxx
Thank you so much :)
Very well explained. Subscribed!
Awesome, thank you!
well explained video as always!!
Thank you Edwin! be sure to check out my next video. I know you will love it
Thanks mate, very helpful!!
no problemo
Couldn't have summarized it in better. Thank you for this bro.
Thank you SOOO much, this was super helpful! I've been trying to work this out for AGES and the way you explained it is so easy to understand! 🙏
Great explanation of PSI , thank you
Glad you liked it!
Spot on. Thanks Davie. Need to watch it a few more times to get my head around it all fully, but great job on a ten minute intro!
Haha thanks I tried to make it as easy as possible 😂
Great explanation, thank you!!
Glad it was helpful, Eitan!
Very clear explanation. The examples definitely made it easier to understand each rule. Thanks!
Glad it was helpful, thanks for watching, Mike!
Thank you bro. very informative.
Thanks for watching. By the way, somebody was impersonating my channel and replied to your comments. I've reported their comments as spam and had them removed.
Thank you, this was extremely helpful!!!
No problemo Germaine :)
Many thanks for this video! I’d been struggling with PSI for a while, I read the PSI page on my CPA study guide many times and still did get it😢 now I feel I’ve gained good understanding and feel confident to move on with my study.
This is awesome. Thank you.
Thanks, Cara. Glad you liked our video.
Hi Davie, your channel is just awesome. Thanks for helping community via sharing knowledge.
Best wishes from sydney
So nice of you
Legend thank you, been reading up on this for hours, still completely confused I finally found your video - now it's crystal clear.
Glad it helped, Adam!
This has been - SO! HELPFUL! thankyou so much, you've saved me a migraine 🙏🙏🙏
You're so welcome, Monica!
Great video! Spend hours reading this info on the ATO web page and did not get it, while here it took me only 10 min. GREAT!
Glad to hear that! We really aim for our content to be easily absorbed!
Wow, cheers for that, plain english, clear informative and specific. Plain English made for better understanding for newbies to small business. Love your presentation and style ... keep it coming.
Thanks appreciate you watching :)
The ATO should hire you for all future marketing! Thanks mate
haha YES PLEASE!
Really Good Way of Explanation Davie. I want to see all of your videos. I think everyone should watch because they are more helpful than cringy and junk videos.
Thanks for watching !
Very helpful , keep it up, and any update to the rules would be extremely helpful
Perfect video! Wish the ATO would do videos like this
Thanks for watching, Frank!
Like so many comments before me, thank you for demystifying this topic. Honestly it’s as if the ATO wants vague and ambiguous information on their website. Thanks mate
Thank you so much :)
@@DavieMach you’re welcome. I‘ve got a catch up with one of your team members this month, purely based on the quality content you produce. Looking forward to it.
Thank you friendly neighborhood taxman! You make everything so easy to understand!!!
Haha thanks !
Hello. I am so glad I found your channel. I am reading conflicting information on whether youtube/patreon income is PSI or not. Are you able to advise? Thanks. I did the test on the ATO page and it came back as no but I'm so confused. I really have no skills, I'm providing a product and hoping for the best 😂
Your simply a genius..
Thanks for the appreciation!
Hi Davie, I always think company can’t save tax much unless you distribute the profit (dividend ) to a favourable amount each year so that your yearly taxable income is in tax bracket thatyou benefit you most.Bcoz you pay personal tax on dividends or salary from the company, if you distribute all dividend of that year, you still end up paying same tax rate as you pay as a sole trader.
If you pay yourself less dividend, The remaining profit will sit in the company, u lose the opportunity to reinvest. If you invest the profit on company level. You still pay CGT on the return on investment.
When I was in accounting, my boss always tell me sole director don’t pay company tax at all inherently, bcoz director pays the personal tax eventually on the dividend or salary from the company
It will be good if you could elaborate how to reduce the tax on personal level
agreed. A director cannot simply live on company profit.
I am still confused. But I will watch 100 times and I may be good ! Thanks though ...
No worries! Hopefully it makes more sense after only 1 or 2 more viewings!
Thanks
Davie.. bro.. THANK YOU!
No worries mate!
This was SUPER HELPFUL!! Question - if you are in IT, work from home, use your own equipment and are contracted to do work for a specific product result would that meet the PSI so the rules don't apply?
Hard to say exactly with that info but most IT contractors are considered PSI earners and have to attribute their income to themselves.
Hi Davie, with Shirley's case as we figured the PSI does not apply does that mean she will be ale able to pay the company tax rate 25% and claim business expenses ? Or she still have to include the income in her personal tax return but will be able to claim rent etc as business expense
Hi, thanks for the video. It helps me understanding about PSI. However, still curious Does piano teaching job apply PSI rules ? It’s my side job in the school afternoon hours.
Hope to hearing from you soon. Thanks.
Hi Davie, thank you for your video, very helpful!
Step1 Have you received PSI? :Does it apply to the contractor driver who deliver goods (delivery service - road)?
Hi Sophie,
Generally, the PSI rule does not apply to most contractor drivers as the majority of the income is earned through use of machinery or another asset (E.g. Truck). However, if you are still unsure it's always best to speak to a professional or book a 20-minute free consultation with us here: meetings.hubspot.com/boxas/contractor
Your explanation is amazing mate, weldone. I just have 1 question, As a PSB i meat the first and 2nd step, so does this mean psi rules dont apply to me and i dont have to worry about step 3 and step 4 ?
Will appreciate if you can answer?
Thanks for demystifying this. The ATO site was not helpful, they should link to this video!
No problemo!
For step 2 as a software developer, would be being paid for a specific product instead of hourly rates mean you would likely pass it?
Hi Dave, Excellent video. i have a question for whcih i coundt find an answer yet. Can a husband and wife work for the same company, (individual IT contractors) only one being the director and the other one being an employee for the same company, receiving income from 2 different sources ( not related ) atleast, which are not related to each other. genuinely has a website for more clients to provide payroll services. will this be a PSB ? as 80-20 passed and 2 different sources , and genuinue offer to public ? pls do reply, i respect your understanding in this matter.
Hey Davie, very clear video! Would you consider money made from CZcams (income received strictly from ads placed on your videos by CZcams) as PSI or not?
I have been asked that question before and to me its not personal service income. PSI to me is when you trade your personal exertion/labour for a fee. I dont think this is a case at all with youtube income. its more a marketing service
@@DavieMach that's great to hear! do you know if youtube channels operating from inside Australia have to pay GST?
@@cameronleonard4024 you should watch our content creator video! The answer is there
Hi Davie, how about this situation? I am a director and I employ a staff.
I earn PSI from Client A by the hours. This income contributes roughly 60% of company revenue.
My Staff earns PSI from Client B by the hours. This income contributes roughly 40% of company revenue
I do spend times to review my staff's works for Client B. My staff also does peer review of my works for Client A.
Client A and Client B are totally unrelated.
Doesn't this mean I pass the 80/20 rule, and one of the Remaining Test? which means PSI rules don't apply.
Thanks, Davie,
Great video!
Does the rule apply to the owner or the company? For example, the owner does consulting but sells goods using the same Pty Ltd. Less than 80% of the pty revenue is from the consulting services (PSI)? How does this work?
Curious about this too. Similar case. Owner does consulting but hire out equipment using the same Pty Ltd. Also less than 80% of revenue from consulting services. But hiring out equipment wouldn't be PSI, so maybe that is only for PSI income? Does anyone knows the answer?
Hi Davie, Do you have to charge GST, ie if you bill $10k per month (even number example) plus $1k for GST, is your income $11k or $10k for PSI if 100% is from the one client?
Yes you do if you are over 75k a year you need to charge GST even if you have PSI income.
Can y also please cover a proposed tax residency rule for the Aussie expat - can’t get my head around..
Ah sorry, International tax is not my strength unfortunately :(
If my company has two IT consulting contracts with two different companies and two different individuals (me and my friend) working separately on those contracts...would it avoid PSI?
seems its pretty easy to pass the PSB test
Does the Delivaroo food delivery rider's income ($4000) consider as PSI income?
I am still so confused by all this PSI, PSB, PSI test, 80/20 rule, etc stuff. I have started a business going to people's houses to cook and clean for them. I guess I receive PSI since I work for myself, but I don't know if I pass the results test. I get paid for a specific result and I guess I rectify my own mistakes, but since I go to people's houses and use their ovens and stovetops does that mean I don't pass step 2? And so then step 3 I guess the last financial year I did work for multiple clients so I would pass this (although I think this year I may not pass that test because I'm only working for one client at the moment). But then step 4 I have no clue because I first of all don't have a business premise and I don't employ anyone. Similar to step 3 I have unrelated clients, however, a lot of my clients come from AirTasker which I think is apparently a labour hire agency. The ATO says I won't pass the test if quote "you source all your work through arrangements such as a labour hire firm". I don't even know if AirTasker is a labour hire firm though, because I need an ABN to work for them.
I'm just really confused
Hi Davie, a question. If you are PSI and the rules apply, this means that you are not liable for the NES employment standards correct? I have my own private limited by shares company and i'm the sole director and only person in my company and I do work for one client and all the PSI rules apply. I pay myself a wage or hourly rate which is reflected by the service contract. I do not have a written employment contract with myself and my company but I have a service agreement between my company and the client which is based on a daily rate. I heard that a written employment contract actually isn't required and that NES standards are enforced but I hope i'm not liable to pay myself annual leave. I don't know how NES would even work if you had to pay all your revenue out.
From my understanding, you dont need to worry about this if you are referring to yourself as the sole director/employee. the NES is to protect employees (not related to the business). Once you hire another employee then you need to apply NES to this employee.
@@DavieMach Does this matter if you've used STP and used Gross payments in MYOB and paid an hourly wage but your income is purely suppose to be PSI? I'm having to ask the ATO this as the ATO says you can't report PSI using STP. If I report it as a wage through STP, does that make me liable for any of the NES standards?
Hi Mr.Davie.. Thank you so much for this explanation. Can you kindly advise me whether Part-time private music tutor who has about 5 to 10 students is a PSI or a PSB and how to lodge his Tax please..? Thank you so much..
It will probably be PSB but you will fail the psi anti avoidance tax rules if you try to receive the money else where
@@DavieMach Hi Mr. Davie. Thank you so much for being so kind and helping me out. May I knw what do u mean by " receive the money else where " ? payment for the hours tutored will be charged by me and accepted by me. it will be a part time income just for me as an additional income apart from my full time job.
Hi Davie,
If a sole trader is earning $150k as a PSI they end up having to pay about 26% in tax - so if they start to earn more than this it will be worth switching over to a PSB? Is that right? Or are there some other factors which might make a PSI want to swap over at lower incomes, i.e. $100k?
Thanks,
Chris
Hi Chris,
There are generally more factors other than the thresholds that'll affect one's decision in this scenario. We'd recommend seeing a professional in this case since a multitude of conditions can affect what would be optimal.
Hopes this helps Chris!
What are your thoughts on the ATOs New TR2021/D2 ruling.
hard to summarise my thoughts. Best I do a video on it! its just been crazy busy so I haven't been able to revisit this topic for a while.
At 1:24 in your example what would be the overall tax payable if the company then past on the after tax income to the individual as a dividend fully franked
Yes good question, if you pass the profit to the individual then that means that the individual has received all the income so the tax will imposed on the individual as well.
The good thing is that if that tax has been paid by the company at 26% you get a tax credit in the individual. However you probably have to pay a top up tax as the 26% tax may not be enough and its dependent on what the income level is for the individual. Say they are at 45% tax rate then they will have to pay top up tax of 19% + medicare levy
Hello there-I just want to ask does Personal Services Income affects BAS lodgement? If yes, how?
If you charge gst yes you have to lodge BAS.
I am a retired Software Engineer and have just been offered a 12 month contract interstate. Can I at least claim the cost of a Serviced Apartment fir the duration of the contract, as a Tax Deduction? Excellent Video BTW.
Hey Justin, thanks for watching mate.
You could possibly claim it as an expense but there will be FBT implications and LAFHA. LAFHA and FBT is complicated so you will need to def speak to an expert to see if it will apply to your business/situation!
What about for a freelance web developer or something like that?
Its personal income, you will need to walk through the steps.
You should normally be able to meet the results test or 80.20 rule.
How about an online, from-home, life coach/adviser/mentor?
Hey Jesse, it depends on how the contract and agreement is set with the client. Is it hourly or fixed month to month. I think most life coaches, advisers should be fine to pass the PSI test but it you need to apply it case by case. For example if you have multiple clients (with 1 no more than 80%) and charge a monthly set fee (not dependent on hours worked), you most likely will pass the PSI test and the PSI rules wont apply.
Hi Davie
I am an auditor. I have an office and I have no employees but I have numerous clients and I advertise my business online. I have my own PI Insurance. I operate through a company. Can I retain profit in the company and pay tax at the company level?
I recommend you look at PCG 2021/4 Allocation of professional firm profits. This ATO guide will answer your question! www.ato.gov.au/law/view/document?DocID=COG/PCG20214/NAT/ATO/00001
Hi Davie, I am working as a IT Contractor on TFN. If I set up a company or work as a sole trader will I pass the PSI test?
You have to meet the psi rules to pass the test. Have a watch of the video and go through the tests I provide in the video.
watch the bloody video
Another question that has stumped me. If you become a sole trader, there's only certain work that can be done through a sole trader. Like if you do work for a client and even invoice clients and the payment is not based on results and more based on time, ATO will regard you as an employee and not a contractor. But the same person could easily run their own Pty Ltd company as a sole director with PSI applied and pay out business profits and this is allowed. It's like why does the ATO care about what you can and can't do through a sole trader if you can just do it through a company? I think it's to prevent sham contracting but it punishes those that want to go through these arrangements by choice. etc they are compensated higher in lieu of employee benefits.
the whole goal of PSI is to stop ppl who are employees that should be taxed at 32.5-45% tax rate and restructure to get a 25% tax rate instead as a company tax rate.
To me in the end it doesnt matter as if the individual wants to withdraw the money they still end up paying the 32.5 - 45% tax rate in their personal name but thats what the ATO is trying to prevent.
hi i want to start an automotive business what should i do
Get your licenses, insurance and registrations and just get started.
Such great and well presented video!!! I was wondering if I’m a contractor full time with one client ( bank) and draw a sole income from this - not eligible for a company tax?
Hello, it looks to me that you will fail the PSI rules and will have to pay out the profits and net income to you in a form of a wage and dividend. So yes not eligible for company tax. If you only have 1 client its hard to prove that you are running a PSB.
also disability support workers like me : )
I work as a sole trader thru a platform called Mable. if I have multiple clients thru Mable, let's say 70% from Steve and 30% from Theo, would it still be considered one income stream -as it's all coming from the Mable platform?
and also, if I instead had one client who I charged 70% thru one platform "Mable" and charged 30% thru another platform "Mobility," would this still be one income stream also?
any insight would be super helpful. cheers : )
It has to be separate clients
Doesn’t matter on platform :)
@@DavieMach cool thanks !!
Fantastic video, thanks so much for the explanation. I am also an Independent Disability Support Worker with own ABN and currently only have 1 client for 3.5 hours a week alondside austudy. I get paid via a plan management organisation. I don’t pass Step 1 or 2, but because the disability Support work only makes up less than 50% of my total income, so passing Step 3, and unfortunately not passing step 4, would i then not pass the test and would be considered as PSI? That is, assuming I actually meet the tax paying threshold…
Dave, Are you based out in Sydney? Would love to catch up with you. Looking for a tax expert to save some bucks for a sole trader.
Yes i am! you can book a free consultation on our website
@@DavieMach can you please send me your business website link?
@@Marshall_Mathers_Fan Hey, you can just search box advisory services on google :)
what if you are on welfare and do gig work?
Here's a question even the ato cant give me an answer for and you know about psi, so maybe you would know the answer.
A) my company who I contract through receives PSI income and all the rules apply in determining if the psi rules affect me. I make payments on the 1st day of the following month for any business revenue my company receives. On 1st July, ato tells me that all wages paid up to 14th july will be treated like they were paid on 30th June. This means, when I pay on 1st july, I need to use 2021- 2022 tax tables for withholding payg. But what about super. Do I withheld at 10% or 10.5% for the superannuation guarantee component of the wages payment/pay run on 1st july?
Ah i remember this question. I am not 100% sure but from my memory you the rates change in 1 July 2022 so it will be 10.5%. however i tell my clients/business owners to pay before 30 June 2022 so they are the 10% rate. I know I am quite cheeky.
@@DavieMach How do you do an out of cycle pay run in MYOB? essentially i'd have to run a pay run on 30th june instead of 1st july. Can i still use a monthly pay cycle even though technically it's one day less than a month?
@@agentdark64 sorry thats a question for a bookkeeper. I dont use MYOB payruns as much anymore. So cannot answer it.
I would change the payment date to 30 June to ensure its included FY 2022 payrun.
Also, spoke to my team and we believe that if the payrun is regarding 2022 FY then its 10% super rate.
01:24 - Your income tax rate would be 45%... This is NOT correct... Your MARGINAL tax rate would be 45%. Your overall tax on $250,000 as an individual would be $83,000, which works out to be approximately 33%. Tax saving would NOT be 19%, it would only be 7%!!!!!
Hey Mark
Thanks for your comment.
We simplified this video as the focus is more on PSI rather than how the progressive tax system works. We tried our best to make it easy to understand for everyone and not just accountants.
I wouldn’t agree with what you said as well. The income bracket between $180k - $250k is infact a tax saving of 19%.
If you argue effective tax then I agree with you. Anyway this video is for explanation purposes and it’s to help people understand the complex tax system. Anyway I get where you are coming from!
Thanks!
10:00 These rules are utter rubbish. Just because someone had 2 clients shouldn't get them a tax rate better than a similar situation of 1 client.
Only way to get these stupid rules is for the general public to form an NGO that goes after politicians and their tax avoidance
I just work as an accountant. I don’t make the laws :P
This is such a complicated topic. Thanks so much for simplifying it!
No problem Kan :)
I have struggled to understand PSI. Thank you SO MUCH for this video!
You're welcome Kara! Glad you found it helpful. Also, thanks for subscribing :)
@@DavieMach you're welcome! I look forward to your future videos.