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Personal Services Income...

Discussion in 'Accounting, Tax & Legal' started by BigStrawbs, 25th Mar, 2010.

  1. BigStrawbs

    BigStrawbs Member

    Joined:
    16th Oct, 2009
    Posts:
    15
    Location:
    Adealide, SA
    Hi,

    I have a problem (I think) and some advice on the best way to move forward would be great.

    To cut a long story short, I have lost a contract and therefore I will be deemed to have Personal Services Income and therefore the Trust structure I have been operating under will no longer be deemed “correct” or whatever the right legal name is (i.e. I have been operating with a corporate Trustee paying myself 80K + super with the intention of transferring the money from the Trust, around 40K, to my wife at the end of the final year).

    With the above in mind:
    a) Do I have a problem (I think Yes)
    b) If Yes: How big of a problem?
    c) Should I pay myself all of the income I earn for the rest of the FY?
    d) Is it worth delaying any income until the next FY to reduce my total income in this year?
    e) Anything else I need to worry about?

    Thanks,
    Brian.
     
  2. Superman

    Superman Well-Known Member

    Joined:
    6th Nov, 2007
    Posts:
    343
    Location:
    Gold Coast, QLD
    Yeah - PSI is fun.

    Basically works via 4 tests:

    1. Results test
    2. Unrelated client test
    3. Business premises test
    4. Employment test

    Primarily you need to look at the results test. This is basically where you are paid to obtain a specified outcome - rather than receiving an hourly rate / time-based remuneration.

    If you don't pass the results test, then you need to go through and look at the other tests. Refer to the attachment from the ATO in regards to each of the tests.

    The following flowchart will help you work through it:

    [​IMG]

    And if you are still unsure you can always apply for a determination from the ATO.

    I assume you have been getting through on the unrelated clients test (80/20) rule - hence your concern.

    All is not lost however. If you can fulfil one of the other tests you may be OK. Also if there is unusual circumstances you will be OK.

    Alternatively look at the contract you have still got, and see if they will work with you to ensure you will be deemed as a contractor via the results. This would involve some re-wording to your contract and changes to how you work actually plays out.

    Also, based on your structure, you probably have got some half-decent advice along the way. Assuming an accountant advised you on your structure - shouldn't they be your first port of call?

    I hope this information helps.

    SM
     

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  3. BigStrawbs

    BigStrawbs Member

    Joined:
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    Posts:
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    Location:
    Adealide, SA
    Personal Services

    Thanks Superman.

    I have previously gone through the tests and have come to the conclusion I will full under Personal Services Income. Your point about the Accountant is a good one - I did get what I thought was good advice when setting things up but it turns out they are not very good at the follow-up, hence seeking some advice here. So given I know I will come under PSI, I guess I am asking what is the best way to move forward (ie reduce my income in this financial year, ensure I pay myself all money earned each month to reduce the amount sitting in the Trust, etc, etc).

    Cheers.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
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    Location:
    Sydney, Australia
    Perhaps you could explain your situation in a little more detail? That might help us to suggest an alternative strategy?

    Am I correct in assuming that you had something like 2 contracts and now since one of those contracts is gone, you only have a single source of income?

    If that is the case, is it ever likely you will gain an additional source of income?

    Are you just doing long-term contract work, or are you actually running a consulting business?

    They key test in my mind is what I call the "remedy" test. That is - am I just a guy sitting there, doing what I'm told and if things go wrong, I don't get held personally responsible and liable to remedy things? ... ie. I'm just like all the other employees? If so, it's really personal services.

    If, on the other hand, I'm working largely independently (under instruction, but not under supervision), on a project for which I have an agreement and if things go wrong with my work, I am expected to fix them under the terms of the agreement (and potentially for no extra money) ... then I think I've got good grounds for arguing I'm an independent consulting business and not providing personal services.

    It's all part of the business "duck test". If what I do looks, sounds and acts like I'm running a business, then I'm pretty confident I really am running a business and not providing personal services.

    Apologies if I'm on completely the wrong track here.
     
  5. Superman

    Superman Well-Known Member

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    Location:
    Gold Coast, QLD
    Good work Sim

    I think you just described the 'Results Test'!

    The Results Test is the penultimate test when it comes to PSI. If you satisfy the results test, then your income will not be PSI.

    Refer to my earlier entry on this thread for more information if needed.

    SM
     
  6. Rob G.

    Rob G. Well-Known Member

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    Melbourne, VIC
    Leaving aside any possibility that the other tests may be passed, since I don't have enough information ...

    There is a possibility that the ATO may excercise discretion if it is reasonable to assume the lack of other clients is a temporary affair.

    The fact that you had a wider range of clients in the past, and any plans for extending your business clients in the short-term may give weight to any claim.

    Just a thought.

    Cheers,

    Rob
     
  7. BigStrawbs

    BigStrawbs Member

    Joined:
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    Posts:
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    Location:
    Adealide, SA
    Further Info

    Thanks for the advice guys, it is greatly appreciated.

    I now “get it” that just because I don’t meet the 80/20 rule, there is still a good chance I could be OK.

    My situation would be summarized as:
    a) I am working in a longer-term contract for one client and doing some adhoc work for another.
    b) The “other” is generally 1 day a week but up to 2/3 days a week every now and then.
    c) A contract for another body of work recently fell through, so I will fail the 80/20 test. However, I am always looking for new contracts (I have the correspondence of making contact on a regular basis) and to grow my business both in terms of customers and billable fees.
    d) Both companies I work for are very clear I am a contractor in their view (i.e. they are government agencies and my fees are negotiated outside of any EB, I don’t attend their general training courses, I am employed with fixed deliverables, etc, etc). However, the longer-term contract I have is for a fixed time period but if I did finish the work earlier, my engagement would be terminated earlier.
    e) I was engaged by both companies separately (i.e. via word of mouth) via my own Trust structure which has a corporate Trustee.
    f) I provided my own materials, use my own methodologies, use my own templates, etc, etc (I mainly do Project Management work and use my intellectual property at both locations for all tasks) – my clients only provides a computer onsite which they do for all contractors.
    g) In both cases, I “under instruction, but not under supervision” and would need to address any problems I may create either by my actions or advice.
    h) I am insured for Professional Indemnity in case I get sued for bad advice (not likely but possible) and registered with Work Cover.
    i) I only started working for myself in Aug 09, so this is my first tax year. However, as mentioned above, I am always looking for new customers.

    Do I have a fighting chance or is Professional Services the likely outcome?

    Again, thanks for the advice to date and any further comments would be most welcomed and appreciated.

    Cheers.
     
  8. Superman

    Superman Well-Known Member

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    Location:
    Gold Coast, QLD
    Based on what you have said I reckon you will not be hit by the PSI rules.

    If you really want to be sure you can apply for a private ruling / determination with the ATO.

    They are cracking down on contractors too - even in today's AFR near the back there was something from Nick Sherry about making it an 'even playing field'

    Happy to help
    SM
     
  9. MattR

    MattR Well-Known Member

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