Personal services income (PSI) can be a complex topic to grasp, but it's crucial for individuals and businesses to understand so they can navigate the tax landscape effectively. Let’s demystify PSI by breaking down its definition, exploring who can earn it, and providing real-life examples.
PSI, or Personal Services Income, is income derived primarily (more than 50%) from your individual skills or efforts. This means that if the income you receive from a contract is predominantly a result of your expertise, labour, or skills, rather than assets, the sale of goods, or a business structure, it is classified as PSI.
To determine if your income qualifies as PSI, it's essential to evaluate each contract separately. Consider the terms and conditions of the contract, invoices, and written agreements detailing the work arrangement. These documents can help you determine the percentage of income attributed to:
If 50% or less of your income from a contract is attributed to your personal efforts or skills, then none of the income from that contract is considered PSI.
PSI can be earned across various industries, trades, and professions. Common examples include freelance workers, financial professionals, information technology consultants, engineers, construction workers, and medical practitioners. Individuals can earn PSI in two ways:
If you provide services as an individual without any intermediary entity, such as a company, partnership, or trust, your income from personal services is PSI. Let’s consider Andre as an example — a plumber operating as a sole trader. He secures a contract to fix a blocked toilet and repair three leaking taps, billing $25 for materials and $225 for his labour. The total invoice amount is $250, and this income is classified as PSI because it predominantly rewards Andre's personal efforts and skills.
Some individuals provide services through an intermediary entity, like a company or partnership. In such cases, the entity is referred to as a 'personal services entity' (PSE). Take Sandy, for example. She’s an IT consultant and delivers systems analysis services through her company, SP Consulting. SP Consulting enters into a contract with Richie's Computer Co., indicating that more than 50% of the payment for the consultancy services is a reward for Sandy's labour. Consequently, the income is mainly attributed to Sandy's personal efforts or skills and qualifies as PSI.
You can claim deductions against your PSI if an expense occurred earning this income. For example:
To fully understand what you can claim, you (if you're a sole trader), or the entity you're earning PSI through, need to work out if you’re conducting a personal services business (PSB) by using the PSB tests.
When completing your tax return, you need to report your PSI even if you’re a PSB and the PSI rules don’t apply to you. How you report your PSI will depend on whether you operate as a sole trader, company, partnership, or trust. In each case, there are specific labels on your tax return that you need to complete.
We know PSI and the associated deductions can be confusing. We help countless clients understand their PSI requirements every year — we can help you as well. If you have any questions or need advice about PSI, please don't hesitate to contact us.