What is Personal Service Income

Personal Service income is ordinary income or statutory income that is derived mainly as a reward for the personal efforts or skills of an individual. Income derived by an entity (company, trust or partnership) from the personal efforts or skills of an individual also comes within the definition. The use of word mainly implies that more than one-half of the relevant income must be a reward for an individual’s personal efforts or skills.

By ruling TR 2001/7, Income generated by the use of assets, the supply of goods, a business structure or granting a right to use property is not “personal services income”, because it is not a reward for the personal efforts or skills of an individual.

Ruling IT 2639 notes that Personal services income is to be contrasted with “income from personal exertion”

Example of Personal service income is

• income from a professional person (accountant, lawyer)
• income payable under a contract which is wholly or principally for the labour or services of a person
• income derived by a professional sportsperson or entertainer from the exercise of professionals skills
• income derived by consultants from the exercise of personal expertise.

Limitation on individual’s deductions:

The PSI rules contain limitation on the deductions that an individual may claim against PSI.

the fundamental rule is that an amount is not deductible to the extent that it relates to gaining or producing PSI if the income is not payable to the individual as an employee and the amount would not be deductible if the income were payable to the individual as an employee. Consequently, an individual is limited to the deductions that can be claimed against salary and wages by an employee. For example, an individual who works from an office at home would not be able to claim car or other travelling expenses for a journey from home to client’s business premises because the individual could not deduct these expenses if he or she were an employee.

The restriction also comes on individual  for applying deduction of rent, mortgage interest, rates, land tax in relation to her or his residence or an associate’s residence to the extent that the amount relates to gaining or producing PSI.

The individual cannot deduct any payment to an associate, or any amount incurred arising from an obligation to an associate, in relation to producing PSI, unless the payment relates to engaging the associate to perform work that is part of the principal work for which the PSI is produced.

Deduction allowed for Personal Service Income.

The allowable deduction allowable as an exception to fundamental rule are

• gaining work ( advertising and quoting for job)
• insuring against loss of income or income – earning capacity
• insuring against liability arising from acts or omissions in earning income
• engaging an entity that is not an associate to perform work
• contributing to a fund to obtain superannuation benefits
• meeting obligation under a worker’s compensation law to pay premiums, contributions or similar payments or to make payments to an employee in respect of compensable work related trauma