Personal services income for your startup company

Are you thinking of paying yourself, or anyone else, as a contractor?  Then please be aware of the ATO’s rules about personal services income for your startup company.

Why?

Because they can have considerable tax implications for you AND they might mean your startup will need to pay superannuation and workcover, just as if the contractors were employees.

Hang on, doesn’t that defeat the purpose of contractors?

Yes it can.  The personal services income (PSI) rules are designed to stop people minimising their tax situation by acting as a contractor to a business that they are earning most or all of their income from*.

And they’re designed to stop businesses avoiding obligations to contractors who are effectively their employees.

How to figure out if you’ll come under personal services income for your startup company:

  1. First, determine if the income is classified as PSI.  The ATO defines it as: Income produced from your personal skills or effort as an individual, regardless of your business structure.  And if more than 50% of the income received for a contract was for your (or the other contractor in question) labour, skills or expertise, then ALL the income from that contract is classified as PSI.
  2. Then, establish whether the income can be deemed to come from a Personal Services Business (PSB), which means it will be exempt from the PSI rules and you won’t need to worry about them.  There are a few ways you can do this and the ATO has a chart to step you through it here.

If you can’t pay yourself as a contractor, how do you get paid?

Have a read of our post on the best way to pay yourself from your startup company.  And as always, we’d love to chat if you’d prefer that. 

The PSI rules do not apply to employees who are receiving income from salaries and wages only.

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