Picture this: you’ve worked tirelessly to build your business, secured steady clients, and are starting to see the financial rewards. But then tax season rolls around, and suddenly, you’re faced with a pile of rules you don’t quite understand.
Could your business be classified as a Personal Services Business (PSB)?
If so, it changes the game.
Many Australian entrepreneurs unknowingly make mistakes here, costing them money, time, and peace of mind. So, how do you know if your business qualifies? And what should you do about it? Let’s dive into the details.
What Is a Personal Services Business (PSB)?
Think of a PSB as a business where most of the money you make comes from your personal skills, labour, or expertise. In other words, if over 50% of what you’re paid for a contract is due to you—not the materials, tools, or other resources you provide—then you might be operating as a PSB.
But it doesn’t stop there. To officially qualify as a PSB, your business also needs to pass at least one of the Personal Services Income (PSI) tests. Confused? Don’t worry, here’s a quick rundown:
The Results Test
- Are you paid to deliver a specific result?
- Do you provide your own equipment or tools?
- Are you responsible for fixing mistakes at your own cost?
If you answered “yes” to these questions, congratulations! You’ve passed the Results Test.
The 80% Rule
Does more than 80% of your income come from one client? If yes, you need to dig deeper into the other tests to see if your business qualifies as a PSB.
The Other Tests (Pass at Least One)
Unrelated Clients Test: You work with multiple unrelated clients.
Employment Test: You employ others to do a significant portion of the work.
Business Premises Test: You operate from a dedicated business location separate from your home.
Why Does It Matter If You’re a PSB?
Here’s the good news: being a PSB means you’re entitled to the same tax deductions as any other business. From claiming a portion of your home office expenses to paying a family member for admin tasks, the benefits are substantial.
However, there are some important rules to keep in mind:
- Any profits made by the business must be paid to you as wages, directors’ fees, or bonuses. This means you can’t stash profits in a company to take advantage of lower tax rates or distribute them to family members via a trust.
Ignoring these rules can lead to issues with the Australian Taxation Office (ATO), and no one wants that, right?
Is Your Business a PSB?
Let’s say you’re a freelance IT consultant. You’ve just scored a big contract with a major company, and they’re paying you to develop a custom software solution. You provide the code, but they supply all the hardware and office space.
In this case, you might not pass the Results Test, as you’re not providing your own tools or taking on the risk of fixing mistakes. You’d need to assess the other tests to determine whether your business is a PSB.
Now, imagine you’re a self-employed accountant who is working from home. Most of your income comes from preparing tax returns, and you use your own computer, printer, and software. You’re paid for delivering a specific outcome—completed tax returns—and if there’s an error, you’re responsible for fixing it.
You would likely pass the Results Test, making your business a PSB.
What If Your Business Isn’t a PSB?
If your business doesn’t qualify as a PSB, the rules are stricter. The ATO might limit your tax deductions, and you’ll need to include all income as personal earnings. This could lead to higher taxes if you’re not careful about structuring your finances.
Common PSB Industries
Not sure if this applies to you? PSBs are common in industries like:
- IT Consulting
- Engineering
- Legal and financial services
- Medical professions
- Construction and trades
If you operate in one of these fields, it’s worth digging into whether your business structure is right for your situation.
What Should You Do Next?
Still unsure if your business qualifies as a PSB? Here’s your action plan:
- Review the PSI Tests: Check whether your business meets the criteria.
- Consult a Tax Professional: An expert can help you determine the best structure and ensure you’re compliant with ATO rules.
- Take Control of Your Taxes: Make sure you’re not overpaying by claiming all deductions you’re entitled to.
Final Thoughts
Running your own business is a big deal, and the last thing you want is to be blindsided by tax complications. By taking a closer look at your business structure and understanding what it means to operate as a Personal Services Business, you’re setting yourself up for success.
So, ask yourself: Is my business a PSB? If the answer isn’t clear, it’s time to find out. After all, the more you know, the better equipped you’ll be to make the right decisions for your financial future.
FAQs
Can a Sole Trader Be Considered a Personal Services Business (PSB)?
Yes. A sole trader can qualify as a Personal Services Business if they meet one of the PSB tests set by the Australian Taxation Office (ATO). Being a sole trader does not automatically make your income personal services income (PSI) or prevent you from being treated as a PSB.
What Happens If My Business Does Not Qualify as a PSB?
If your business earns PSI and does not pass any of the PSB tests, special PSI rules may apply. These rules can limit the deductions you can claim and may require the income to be attributed to the individual who performed the work.
Do I Need to Apply to the ATO to Become a PSB?
In most cases, no application is required. If you satisfy one of the PSB tests, you can generally self-assess your status. However, if you do not meet the tests, you may be able to apply to the ATO for a Personal Services Business determination in certain circumstances.
Can a Company or Trust Be a Personal Services Business?
Yes. A company, partnership, or trust can be a Personal Services Business if it earns personal services income and passes one of the PSB tests. The business structure itself does not determine PSB status.
How Often Should I Check My PSB Status?
You should review your PSB status each financial year, especially if your client base, contracts, or working arrangements change. A business that qualifies as a PSB one year may not necessarily qualify in the next.
Does Having Multiple Clients Automatically Make Me a PSB?
Not necessarily. While working for multiple clients may help you satisfy the unrelated clients test, you must still meet the specific requirements of that test. Simply having more than one client does not automatically qualify your business as a PSB.
Can a Business Switch Between PSB and Non-PSB Status?
Yes. Your status depends on your circumstances during a particular income year. Changes in how you obtain work, the number of clients you serve, or how work is performed can affect whether you qualify as a PSB.
Does PSB Status Affect GST Registration?
No. Personal Services Business status is separate from GST obligations. Whether you need to register for GST depends on your GST turnover and other GST rules, not whether you are classified as a PSB.
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