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The PSI in PCG 2024/D2 is no longer protected by one of the four PSB tests. Instead, this PCG pushes the PSB tests aside and drags Part IVA back onto the stage.

PSI in PCG 2024/D2

In this episode, Andrew Henshaw of Velocity Legal in Melbourne will look at the PCG 2024/D2. In the next episode we will discuss the examples in the PCG – none of it is good news, unfortunately.

Here is what we learned but please listen in as Andrew Henshaw explains all this much better than we ever could.

To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.

PCG 2024/D2

PCG 2024 /D2 completely changes the landscape around PSI. But before we go through what changes, let’s first look at what we had so far – how you dealt with PSI until now.

PSI Rules

Personal Services Income – ‘PSI’ –  is any income you receive for your ‘personal skills and efforts’. 

50% PSI Test

The very first question you ask is, “Do you even have PSI?” Because if you don’t have PSI, you don’t need to worry about the PSI rules. No PSI means no PSI rules.

You don’t have PSI if 50% or more of your pay is for something other than your ‘personal efforts and skills’. Let’s call this the 50% PSI test.

Sounds simple, right? 50% is a clear number. It can be a clear in or out. You clearly don’t have PSI if you run a big operation and are not even involved in the actual service, or the invoice clearly separates between labour and other things and those other things are 50% or more. Or when you need expensive equipment like a truck, concreter, earth moving equipment, radiology or imaging equipment and so on. Then you clearly have no PSI.

And if you have a profession that doesn’t need many tools – like tax agents, consultants or engineers – and the person works alone, then you do have PSI.

So those are clear black and white. But the line can be very grey.

The Four PSB Tests

Let’s say you failed the 50% PSI test and you do have PSI…and hence the PSI rules apply, unless… you pass one of the four PSB tests or get an ATO PSB determination.

The 4 PSB tests – you already know these – so this is just a very quick rejig of your memory – the 4 PSB tests are the 

1 – 75% Results Test

Is at least 75% of your pay for a result, where you provide your own tools and bear the risk for your work?

2 – Unrelated Clients Test

This is the test most people with PSI pass. The unrelated clients test is that a) no client pays you 80% or more of your income and b) you advertised your services to the public and got at least two clients as a result of this advertising.

3 – Employee Test

Again, no client pays you 80% or more of your income and you have at least one independent employee who does at least 80% of all the principal work in your business.

4 – Business Premises Test

You have business premises where you do all your work and this is not connected to your home and also not at a client’s premises.

If you pass one of these four PSB tests or the ATO gives you a PSB determination, then you don’t need to worry about the PSI rules, so you can pay wages and claim deductions like any other business.

So these tests are a hurdle but especially the unrelated client’s test is not that hard to pass. You get a website, run some ads, get a couple of clients through that, and Bob is your uncle.

And of course, the ATO knows that and is not happy about it. When the ATO is unhappy, they tend to address that source of discomfort. And so this is where PCG 2024/D2 comes in, 

This PCG is not about the PSB tests as such. They are a given. This PCG is about businesses that have passed one of the four PSB tests and so should be ok, but now because of this PCG no longer are.

Bias to Passive Income

The PCG is trying to stop PSI earners from splitting or deferring their income. This just aggravates the bias towards passive income.

Let’s say you as an individual have three buckets of income.

In the first bucket, you have employment income and PSI. In the second bucket, you have business income and in the third bucket you have passive income from assets like property, shares, units, artwork, you name it. 

Now in the first bucket – employment income and PSI – you get no discount, no offset of losses with other income and no splitting of income.

In the second bucket – business income – you get no discount, no offset of losses with other income (in theory there is, but the threshold is $120k total income so in practice there isn’t any offset of losses with other income), but you can split income since the PSI rules don’t apply, as long as you stay clear of Part IVA.

But then in the third bucket – passive income from investments – all gloves are off. You get the 50% CGT discount, you can offset losses without any limits and you can split income without anyone asking questions.

So there is a bias towards passive income, whether we want that or not, whether it is good for us as a country or not, that is a different question.

So this was about PSI in PCG 2024/D2. In the next episode, we look at the examples in PCG 2024/D2.

MORE

PSI in TR 2022/3 – Step 1 to 4

PSI in TR 2022/3 – Steps 5 and 6

PSI in TR 2022/3 – Steps 7 to 9

Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.

Last Updated on 18 November 2024

Tax Talks spoke to Andrew Henshaw - Director at Velocity Legal - for more details.