Personal services income (PSI) is an income tax concept under which income derived by a company or trust conducting a business (known as a personal services entity) mainly as reward for the personal skill or effort of an individual may be attributed to the individual for income tax purposes under certain circumstances.
The PSI received by the personal services entity needs to be attributed to each individual who performed the services (after being reduced by certain deductions), and they must declare the income in their individual tax return. In other words, income tax liability is transferred from the personal services entity to the individual who performed the work. For detailed PSI rules, refer to Part 2-42, Division 84-86 of the Income Tax Assessment Act 1997 (Cth).
The Payroll Tax Act 2007 (the Act) does not contain specific provisions for the treatment of personal services income so ordinary payroll tax rules apply. Payments made by a personal services entity to the individual who performed the services constitute taxable wages for payroll tax purposes when it meets the definition of wages, either under the common law (i.e. an amount in respect of an employment relationship) or under another provision of the Act (such as the contractor or employment agency provisions).
Where an employment agent procures the services of a personal services entity for a client, this may give rise to an employment agency contract as defined in section 37 of the Act (depending on consideration of all relevant facts and legal authorities).
If there is an employment agency contract:
- The employment agent is taken to be the employer.
- The individual(s) who operate through the personal services entity and perform the work for, or in relation to, the services are taken to be the employees of the employment agent.
- The amount paid or payable to the personal services entity by the employment agent in respect of the provision of services in connection with the employment agency contract is taken to be wages and subject to payroll tax.
The payment made by the personal services entity to the individual(s) who performed the services under the employment agency contract is not subject to payroll tax under section 41 of the Act (the double taxation provision).
No employment agency contract
Erica’s business, Industrial Consulting Pty Ltd, is a personal services entity deriving $100,000 from conducting a business. Assuming the PSI rules apply, as more than 50% of her business’ income is reward for Erica’s skills and efforts, she has to declare the payment of $100,000 as PSI in her income tax return.
Industrial Consulting Pty Ltd employs Erica and pays her $60,000 wages, which are taxable wages for payroll tax purposes. This is different from the PSI of $100,000 deemed to have been received by Erica via Industrial Consulting Pty Ltd under the PSI rules.
Employment agency contract
If a contract between Agency A and Industrial Consulting Pty Ltd (which is a personal services entity) is an employment agency contract, under the Act the payments made by Agency A to Industrial Consulting Pty Ltd ($100,000) are subject to payroll tax (assuming none of the clients are exempt from payroll tax). Agency A is liable for payroll tax on these payments and may recover the payroll tax from any non-exempt clients.
Erica receives $60,000 in director fees from Industrial Consulting Pty Ltd. However, Industrial Consulting Pty Ltd does not pay tax on the $60,000 as section 41 of the Act applies to prevent payroll tax being imposed on these payments.