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The practical side of PSI

Sunday, April 06, 2014

ICA member Joe emailed us because he was trying to work out if he passed the Personal Services Income tax rules. I told him that few accountants understood the laws and on the basis of his experience, he agreed. He dug into our website (see the section headed “Taxation Matters” for members) and replied that he thinks he passes. It’s helpful to read the email exchange below:

Email 1

Hi Ken,

Just wondering if you can recommend a PSI savvy accountant in ….. or if you know of a list of these accountants anywhere. I have been to two accountants so far in ….. as I have just moved here and both of them told me they had absolutely no idea about company structures for independent contractors, in fact one of them even told me to PAYG my contract and buy wealth-building products from him!

I have started just Googling for accountants who seem to have small business clients and know how to set up company structures but it's going to be hard to find anyone decent at this rate. Any help would be appreciated, thanks!

Regards
Joe



Email 2

Hi Joe,

My experience with accountants is that they don't understand PSI and that you need to get a good handle on it yourself. I just helped someone in …… who was in dispute with the ATO and his accountant and lawyers had kept him in a pickle.

He sorted his situation pretty quickly once he had some PSI facts. If you're an ICA member you can access info here: (See the articles listed under "Taxation Matters".) My preference is to structure as a partnership rather than a company. The ATO accepts income-splitting for partners.

Re an accountant I could refer you to, I’m afraid I don't have anyone.

Cheers
Ken



Email 3

Hi Ken,

Thanks for getting back to me. Yes, I agree with your comments. After speaking to a few accountants and doing some reading (mostly from your site and the links provided) it is clear I already know much more than most accountants about PSI! So I am going to make my own decisions and then just get an accountant to execute that.

I know it's not your place to give advice but I thought I'd be cheeky and just ask your opinion (nothing more) about my one remaining query. I have decided I am a personal services business for FY14 based on having unrelated clients with less than 80% of income from one source. The issue is FY13 (which I have not yet done my books for).  I am pretty sure I am also PSB but I have more than 80% of income from one source. But I have read that if you are ramping up your business — which I was and you expect to satisfy 80/20 unrelated clients in future you can still be a PSB. So my question is in your experience with the ATO should I just self-assess as PSB and do my books like that or should I apply for a determination from the ATO that I am a PSB for FY13 based on me ramping up and only having that contract for part of the year and then showing that I will be satisfying 80/20 from there on out?

Thanks again for any information you can give, your assistance in all of these matters is incredibly valuable!

BTW, as a side story, a colleague of mine is in a similar position but has satisfied 80/20 for years with multiple contracts but this year will not due to a long contract. So he has applied for a determination from the ATO that he be considered PSB for this FY based on the fact that he has business premises at his home which is in another state. The home office is a completely separate building on his home block of land. He got a call from someone at the ATO who is reviewing his determination yesterday and the man from the ATO asked all about the access to the business premises and house, where is it on the land, if it has toilet/shower and a sign up etc. Anyway it has most of those things and the ATO man said that he is actually an expert on PSI and doesn't often do determinations like that. He went on to say he hadn't intended to pass the determination that it was not PSI but that the phone call changed his mind and the home office sounds like a legitimate business premises. He also said that the rule about working from that office is that it doesn't matter how much work you do in that office as long as more than half of it is activity related to generating that PS income. He also asked was the intention to be PSB due to not passing the 80/20 which it was and the ATO man said well you should have just applied for an exemption to 80/20 for that year, he said they get heaps of those and they are often just passed without an issue. Just thought I'd share that story with you for your information.

For me, I am definitely self-assessing PSB for this FY and am 90% sure I am PSB for FY13. I am also going to have a think about how I might change things next year and will consider your information about working through a partnership with my de facto who is a Doctor but not working at the moment.

Thanks again!
Joe



Email 4

Hi Joe,

If you are a partnership you automatically pass PSI. You don't have to worry.
If you are a PTY or trust:
a) the 80/20 rule only applies if you have failed the results test.
b) You only need to pass the PSI rules for 60% (check the %. it might be 70%) of the year.
Again, go through the details on our website. Our ready reckoner was put together after 9 months of involvement with the ATO.

Cheers

Ken

 

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