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Personal Services Income

Costly ATO Mistake: Should Medical Professionals declare PSI? (Personal Services Income)


Sep 26, 2017


Understanding PSI For Medical Professionals

As a medical professional, you’re valuable because of your professional expertise and skilful labour, not the tangible goods that you may offer — and the labour offer would be all for naught if it wasn’t for the skills and expertise you bring to the table.

[Before you read on … Nitschke Nancarrow has recently launched DocWealth, a wealth, accounting and financial planning firm exclusively for doctors and medical practice owners. Get free resources, podcasts and insights here.]

In the Australian Tax Code, if you earn more than half of your income because of this expertise and labour rather than the sale of tangible goods, then your income can generally be classified as PSI — Personal Services Income.

But the rules become complicated if you own and operate your own practice. If you do, your income might be classified as Personal Services Business (PSB) income.

Understanding PSI vs. PSB Income

You are not off the hook for PSI just because you own a business. If your business, trust, or partnership earns money from the skills and efforts of individuals rather than the sale of goods or labor, then you will likely have to disclose some amount of PSI.

If your business contracts are based upon a certain outcome, then this income is not considered PSI income. But for the vast majority of medical professionals, pay is based on a set hourly or daily rate regardless of the outcome of a particular procedure or consultation, though some procedures performed by cosmetic and elective surgeons may be exceptions.

Even if you are the owner and operator of a Personal Services Business, you will still need to report your amount of PSI to the ATO. It’s helpful to speak with a qualified Tax Accountant in order to figure out if some or all of your income qualifies as PSI.

The ATO offers a simple flow chart that is a helpful first step in determining whether or not you have been paid PSI or PSB. In summation, you’ll only need to disclose PSI if:

• More than 50% of your income for a particular contract was for using your labour, skills, or expertise.
• You did not need to produce a specific result, provide your own equipment or tools or fix mistakes at your own expense more than 25% of the time.
• 80% or more of the income comes from any one particular client.

If you find that you do have PSI income, you will need to report your PSI to the ATO. The deductions you will be able to claim may be affected by your filing. For example, if you are filing as a business rather than as an individual, you will not be able to claim business expenses on PSI income like you would be able to for PSB income. But you may be able to claim certain PSI-specific deductions.

Your tax rate may also differ substantially. Your PSB income will be taxed at the business tax rate, while your PSI will be taxed at the much higher individual rate.

Nitschke Nancarrow can help you understand the rules for PSI and PSB income, including determining whether or not your earnings qualify and how it will affect your tax rate, at every stage of the process.

Read on: Top 10 missed Tax Deductions for Doctors in Australia

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