So you’ve decided to go out on your own. You may be a marketing / IT / Events / PR / Human Resources consultant. You’ve just landed your first client – check! It’s a big client too – even better. This means that most of your company income will come from the one customer. Makes no difference for tax, right? Wrong. If 80% of your income comes from one client (including their related entities), you may find that you fall within the Tax Office’s Personal Services Income Provisions.
What is Personal Services Income?
Personal Services Income is where the majority of your income is earned by your personal effort or skill. Think an IT contractor who mainly contracts to one client, or a Public Relations consultant who earns their income from representing one business.
I’m a contractor and 80% + of my income does come from one client. What are the tax and accounting implications?
There are two main implications:
(1) Regardless of what structure you operate under, if the Personal Services Income regime applies in your situation then there are certain tax deductions you are not able to claim. These include:
- mortgage interest, rates and land tax (bear in mind that claiming these ordinarily would also trigger capital gains tax)
- payments to associates (remuneration, superannuation, an allowance, reimbursing an expense, rent, interest on a loan) for support work
- car expenses for more than one motor vehicle
(2) Under the Personal Services Income regime, it also means that all income received in your chosen business structure is attributable back to you personally. So, if you operate under a company structure, then all income has to be recorded in your own personal tax return. This means that any of the perceived tax advantages which are associated with creating a company structure are no longer relevant.
Are there any exceptions?
Yes, there is an exception even if 80% of your income comes from one client. If you satisfy the ‘results’ test then the PSI rules will not apply. To satisfy the results test, you must answer yes to the following three questions (for at least 75% of your income which is a result of your personal effort or skill):
(1) Under your contract or arrangement, will your business only receive payment when the work has been completed, that is, after producing the contracted result?
(2) Does your business need to provide the equipment or tools necessary to do the work?
(3) Do you have to rectify defects in the work, or is your business liable for the cost of rectifying defects?
If you’re a contractor or consultant, it’s important to track which clients your revenue is coming from and be aware of if and when the personal services regime may impact you and your startup.
This article is general in nature and is not intended to replace in any way professional accounting and legal advice.