Personal Services Income (PSI) is the income you earn primarily through the use of your skills and efforts as an individual. The PSI rules have been put into practice to stop people who earn PSI from paying wages to their spouses or family members to reduce their overall tax bill.
For example – Mary earns $120,000 running a special occasion bear business through a company. As the money is derived mainly from Mary’s individual skills, the income is classified as PSI. This means Mary cannot pay her spouse a salary for bookkeeping and other duties and the income is declared on Mary’s personal tax return. The PSI rules can be avoided however if one of the following tests are passed.
Result Test
The main test is called the Results Test and if you pass this test, the PSI rules does not apply. To pass this test you must meet the following criteria:
- You are paid to produce a specific result
- You are required to provide the equipment and tools to do the job, and
- You are required to rectify mistakes at your own expense
To pass the results test, you need to meet all three conditions for at least 75% of the PSI being tested
80% Test
If you do not pass the results test, you may still be able to exclude your income from the PSI rules if you don’t receive more than 80% of your income from the one client (including their associates) and you pass one of the following three tests.
Unrelated Client Test
You pass this test if you work for two or more unrelated clients, and you offer your services to the public.
Employment Test
You pass this test if your business employs other people as subcontractors or employees.
Business Premises Test
To meet this condition, you must use the business premises mainly (that is, more than 50%) for work that generates your PSI. It is not enough to own or lease the premises and conduct activities that are unrelated to your personal services work at the premises.
If you do not pass the above tests and you have unusual circumstances, you can apply for a Personal Services Business determination.
Please contact our office if you are concerned that you may be receiving PSI and would like us to review your circumstances.
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