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It doesn’t matter what sort of entity you are using to run your business. You could be operating as a company, trust or partnership, and your income could still be deemed as Personal Services Income.
Personal Services Income is income that is mainly derived from the personal exertion of an individual.
To work out if any of your income is Personal Services Income you need to look at each individual income contract and answer the following two questions:
In answering the above questions, if more than 50% of the income you received relates to personal exertion then this income is Personal Services Income.
Subsequently, if less than 50% of the income received relates to personal exertion then the income is not Personal Services Income. Below is a list of some of the types of income that are not considered Personal Services Income:
Once you have determined that you have received Personal Services Income you then need to work out if the Personal Services Income (PSI) rules apply.
To work out if the PSI rules apply to your business you need to work through the following tests in this order:
If you pass this results test then the PSI rules do not apply. If you do not pass the results test you need to apply the next test which is “The 80% Rule”.
If your outcome from the above was that you passed the tests then your Personal Services Income is not subject to PSI rules. This means that you are now classed as a Personal Services Business. As a Personal Services Business, other than reporting certain information in your tax return, there are no other changes to your tax obligations and no changes to the deductions you can claim. Please note: the character of the income has not changed so any profits from Personal Services Income must still be attributed to the individual who performed the service. This must be done, regardless of what type of entity you the Personal Services Business operates from.
If you did not pass the above tests then your Personal Services Income is subject to the Personal Services Income rules which means the following will apply:
This is a complex area and if you have any questions or would like further information please contact our office.
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