By Max Newnham
At the same time the GST system was introduced the personal services income rules were also introduced. Where a business is caught by the PSI rules there are severe tax limitations placed on that business.
Where a business receives more than 50 per cent of its income from a contract purely for the supply of labour, which depends on the skills or expertise of the contractor performing the work, then all of the income under that contract is classified as PSI.
The stricter tax rules apply to a personal services business. The first step of assessing if a business is a PSB is that it earns PSI. A business is not classed as a PSB where it can show it passes the results test by:
- Being paid to produce a specific result rather than billing for hours worked.
- Provides the equipment or tools necessary to produce that result.
- Any mistakes made must be fixed by the business at its own expense.
If a business fails the results test, and 80 per cent or more of the income is earned from one client and its associates, it will be classed as a PSB.
If less than 80 per cent is earned from one client the business will not be classed as a PSB if it passes one of the following final 3 tests:
- The PSI income was earned from two or more unrelated clients.
- At least 20 per cent of the income earned was generated from work done by either employees of the business or other contractors.
- The business is operated from premises that are used exclusively by the business, the premises are separate from the owner’s home, and the premises are physically separated from that of clients.
If the business is classed as a PSB it cannot claim a tax deduction for:
- Rent, mortgage interest, rates or land tax related to the owner’s home.
- Payments to a spouse or associate the support work such as secretarial and bookkeeping duties.
- Expenses that could not generally be deducted by an employee.
In addition the PSI earned by the business must be allocated to each individual who performs the services, after being reduced by allowable deductions. Any payments made to working employees of the business must have tax deducted as if they are an employee, and any profit must be declared by the individual earning the PSI.
Q. I have just set up a company with myself and wife as the two directors. At present the only income of the company is my consulting hours for which my company bills the vendor. I am getting the amount in my company account but now have to pay myself and my wife, who does booking etc. What are the most important tax deadlines that I should be aware of related to filing returns, and what is the best way to pay myself and my wife?
A. The deadline for lodging your company’s 2018 income tax return, if it is turning over less than $2 million annually, is May 15, 2019. As long as your business is not classed as a PSB you can pay salaries to you and your wife on the basis of the hours worked at a market rate.
Source: The Age
