Income from Personal Effort or Skills

Hello Chasers,

The ATO is reminding taxpayers that, if over half their income is from a contract for their personal effort or skills (rather than earned from the use of assets, the sale of goods or from a business structure), then their income is classified as personal services income (‘PSI’).

Taxpayers can receive PSI in almost any industry, trade or profession, e.g., as a financial

professional, IT consultant, construction worker or medical practitioner. For example, David is a plumber, and he charges $250 for a plumbing job. He charges $60 for the tools he supplied, and the rest is for his labour. David earned more than half of his income for the job through his personal effort or skills, so the income is considered PSI.

Taxpayers who earn PSI (and who are not employees) need to work out if they were a personal services business (‘PSB’) in the year that they received the PSI, as this will affect the deductions they can claim.

Taxpayers can self-assess as being a PSB if they:

  • meet the ‘results test’ for at least 75% of their PSI, or
  • meet one of the other PSB tests, and less than 80% of their PSI is from the same entity and its associates.

Taxpayers who self-assess as a PSB still need to report their PSI in their income tax return and keep certain records. If they are unable to self-assess as a PSB for a particular income year, they may be able to apply for a PSB determination in certain circumstances.

Other PSB tests taxpayers can use include:

  • the unrelated clients test;
  • the employment test; and
  • the business premises test.

It is important for taxpayers to report PSI correctly in their tax return, as it can affect the deductions they can claim.

As will all matters relating to tax and financial information, please contact our Team on 0355612643, if you are unsure and have queries.

Have a great day!

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