Personal services income (PSI) is income that is mainly earned from an individuals personal skills or efforts. It includes any type of taxable income related to professional services, such as independent contractor work, consulting fees, and self-employment income. Examples of personal services businesses include doctors, law firms, accountants, architects, and some medical practitioners.
When working out if income is PSI, it is necessary to look at the income received from each separate contract or invoice. If more than 50% of the income received for a contract/invoice was for an individuals labor, skills, or expertise, then all income received is PSI. If 50% or less of the income received for a contract/invoice was for an individuals labor, skills, or expertise, then none of the income received is PSI.
If an individual receives PSI, the amount they receive will be added to their ordinary income and will be subject to ordinary income tax rates and thresholds. When the PSI rules apply, there are limitations for deductions that can be claimed against this income. In general, an individual who earns PSI is treated as though they are in the same position as an employee. Deductions that cannot be claimed against PSI include rent, mortgage interest, rates, and land tax, payments to associates for non-principal work, and super contributions for associates non-principal work. However, expenses such as the cost of gaining work, registration and licensing fees, account-keeping fees, and some insurance costs can be claimed as deductions against PSI.
It is important to note that salary and wages as an employee and some other types of income will not be affected by the PSI rules.
