Do you use your own company to contract and if so
do you pass the PSI rules?
Most IT Contractors do not pass the ATO’s personal services income rules and should be treated as an employee. This is the exact reason Power Pays exists. We allow you to focus on your contracting career without the need to be concerned that you fall foul of the personal services income rules, do company tax returns and BAS’s.
Power Pays is here to maximise your earnings through compliant salary packaging and to take the risk and burden off your shoulders.
Most Recruitment Agencies are now being asked to supply the details of each company they make payments to. This means at some point in the ATO will be assessing if your company fails the PSI rules and the repercussions for you are high if your found to have failed. Most people mistaken think it is just a matter of the 80/20 rule. This is wrong! Read below to see if you comply.
To be sure that you pass the PSI rules you should request an ATO Personal services business determination. (click here for the application form) This will state the PSI rules do not apply to your business. It is very worth reading the application as you will soon understand if you pass the personal services rules or not. If you or your entity do not pass then you should be working as a PAYG via your agency or with Power Pays.
Personal Services Income Rules
1. Personal Efforts and Skill:
Is the income the contractor earns mainly (i.e. more than 50%) a reward for personal efforts and skill? If no, the PSI rules do not apply. If yes, continue to the next question.
2. Results Test:
Is the results test met? The results test is met in an income year if, for at least 75% of the personal services income, the answer is ‘yes’ to all of the following questions:
Specific Result: Under the contract or arrangement, is the personal services income paid to achieve a specified result or outcome?
- Tools and Equipment: Does the service provider (whether individual, company, partnership or trust) have to provide the tools or equipment necessary (if any) to do your work? (if no tools or equipment are required, the answer is ‘yes’)?
- Defects: Is the service provider (whether individual, company, partnership or trust) liable for rectifying defects in work undertaken?
If the results test is met, the PSI rules do not apply. If the results test is not met, continue to question 3.
1. 80/20 Rule:
Does 80% or more of the contractor’s personal services income come from one client? If the answer is yes, the PSI rules apply unless the contractor has got a PSB Determination from the ATO saying that the PSI rules do not apply. (Such a determination will only be given in unusual circumstances, such as the contractor commencing work very late in the financial year and thus PSI rules cannot properly operate for that financial year.) If the answer to this 80/20 rule is ‘no’, then continue to question 4.
Please note the ATO has already deemed working through two or more recruitment agencies does not apply to this situation.
2. Three More Tests:
Are any of the following tests satisfied. If the answer to any one of them is ‘yes’, the PSI rules do not apply, otherwise they do:
- Unrelated Clients Test:
Does the individual doing the personal services work have personal services income from two or more clients who are not associated with each other or with him/her or his/her entity? (If yes, test is satisfied)
(The personal services must also be provided as a direct result of making offers to the public, for example, by advertising or word of mouth, but not registering with a labour hire firm, placement agency or similar organisation.)
- Employment Test:
Does the contactor or his or her entity engage employees or subcontractors to perform at least 20 per cent (by market value) of the principal work (if ‘yes’ – test is satisfied), or does the contractor have apprentices for at least half of the income year? (If ‘yes’, test is satisfied.)
(Principal work is the main work that generates the personal services income and does not usually include support work such as secretarial duties.)
- Business Premises Test:
To pass this test, there must be a ‘yes’ answer to all of the following questions.
At all times in the income year are the business premises:
- owned or leased by the personal services provider (i.e. individual, company, trust or partnership earning the PSI income)?
- mainly used for personal services work (i.e. more than 50% of the time) by the individual doing the work?
- used exclusively by the personal services provider?
- physically separate from the private residence of the individual doing the personal services work, or their associates?
- physically separate from the business address of clients or their associates?
As you will see it is almost impossible for a contractor that works for an hourly / daily rate via a range of Recruitment Agencies to pass the above test.
If you would like some help to see if your company passes the PSI rules we are more than happy to discuss this with you.
Power Pays – The Contractors Choice.