What is personal services income?

Ordinary or statutory income will be treated as personal services income (PSI) if it is mainly a reward for a person’s personal efforts or skills. Where the income is derived by an entity other than a person, the test requires an examination of whether the income would mainly be a reward for that person’s personal efforts or skills had it been derived directly by the individual.

Subsection 84-5(1) states:

Your ordinary income or statutory income, or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income).

In TR 2001/7 the ATO provides its interpretation of “mainly”:

Implicit in the use of the word “mainly” is that more than half of the relevant amount of the ordinary or statutory income is a reward for the personal efforts or skills of an individual.

Whether an amount of income is mainly a reward for an individual’s personal efforts or skills is a question of fact.

Income derived from the use of an asset cannot be PSI. However, according to Taxation Ruling TR 2001/7, income derived from the provision of personal services involving the use of some equipment may nevertheless be PSI. Where the substance of an agreement is the provision by an individual of his or her personal efforts or the exercise of his or her skills, or the production of a result from those efforts or skills, income would be regarded as PSI.

Income that is derived mainly for the sale and supply of goods or for granting a right to use property is not PSI.

Income derived as a result of a business structure is also not PSI. TR 2001/7 states that when determining whether income is mainly a reward for the personal efforts or skills of an individual or from a business structure, consideration should be given to the relative values of the efforts or skills of the individual and other inputs, such as the efforts of other workers, and the use of plant and equipment, intellectual or other property and goodwill.

Factors relevant to making this determination include:

the nature of the activities being conducted that generate the incomethe extent to which the amounts paid under an agreement (whether directly to an individual or to an interposed entity) is primarily for the personal efforts or skills of a particular individualthe extent to which the contract price has been calculated having regard to the costs to be borne by an individual or entity in providing assets to use in the performance of contractual obligationsthe market price of using any equipment, plant or tools as compared with the market price of hiring the relevant labour or skills for the same periodthe nature, size and significance of the assets used by the individual or entity in relation to the activitythe value of the asset in relation to the total income generated under the agreementthe uniqueness and degree to which an asset is specialised in the performance of a particular functionthe uniqueness, level of skill or degree of specialisation of an individual to provide the particular services contractedwhether the payments made to an individual or a entity is for the transfer of the ownership or a right in respect of items produced by the individual or entitythe existence of goodwillthe existence of substantial income-producing assetsthe size of the business operation, andthe contribution of other workers to the income-earning activities.

The Full Federal Court held in Russell v FCT (2011) 79 ATR 315 that the PSI rules applied to the personal services income of an Australian resident derived from a New Zealand company (a non-resident). The court also held that no double taxation arose under the Australia-New Zealand double tax agreement as the PSI was effectively excluded from the New Zealand company’s taxable income because it was a deduction from assessable income.

The ATO holds the view that medical practices, which have at least as many non-principal practitioners as principal practitioners, are deriving income from the business structure (ATO IT 2639). “Principal practitioner” here refers to a professional or non-professional staff member who derives material fees for the practice and owns or shares in the ownership of the practice, whether directly or indirectly.

A payment received by a personal services entity from a service acquirer during a period when the services are not actually provided until further called upon is personal services income (TD 2015/1).

Examples A taxpayer owns one semi trailer and he is the only person who drives it. The income derived from driving the truck is not PSI because it is mainly produced by the use of the truck and not mainly as a reward for the personal services of the taxpayer.

A taxpayer provides a computer programming service but she does all of the work involved in providing those services and uses the client’s equipment and software to do the work. The income derived would be treated as PSI as it is a reward for her personal efforts or skills.

A taxpayer works as an accountant with a large accounting firm. None of the firm’s ordinary or statutory income is PSI because it is produced mainly by the firm’s structure and not mainly for his personal efforts or skills.

What is personal services income? What is personal services income? What is personal services income? What is personal services income? What is personal services income?

What is personal services income? What is personal services income? What is personal services income? What is personal services income?