PSI - Personal Services Income EXPLAINED

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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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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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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.

[VictorZ]

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 YouTube 🙏🏻

[HosseinSadeghi-cjdf]

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.

[tarzenoftheapes]

Couldn't have summarized it in better. Thank you for this bro.

[amberwu]

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.

[KRAZYKORO]

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.

[shaifaligupta]

Hi Davie, your channel is just awesome. Thanks for helping community via sharing knowledge.
Best wishes from sydney

[adachen]

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

[warmwallaby]

Legend thank you, been reading up on this for hours, still completely confused I finally found your video - now it's crystal clear.

[hazelnut]

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.

[khurram]

excellent video Davie, ,
what if Shirley the IT consultant got her first contract with the bank extended for another 6 months?
in that case will she still qualify as PSB 26% tax rule.

[agentdark]

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.

[tysont]

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

[RealAnwarAziz]

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?

[CS-ndmu]

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

[LucasSadler]

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?

[agentdark]

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?

[umasankar]

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?

[shalinderpalsingh]

hi i want to start an automotive business what should i do

[c_________]

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 : )

[markjohnston]

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