PSI Division 85 to 87 Flowchart and Steps 2021 PDF

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Summary

Personal services income div 85 and steps how to do...

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Specific Anti Avoidance Provisions: Alienation of Personal Services Income Division 84 to Division 87 ITAA 1997 – Division 84 determines whether a taxpayer is earning personal services income (PSI); – Division 85 limits the deductions for individuals earning PSI ; – Division 86 consequences of individuals diverting their PSI income to other entities. – Division 87 exception if individuals are conducting a ‘personal services business’ then Division 86 does not apply

Taxable Income

Personal Services Income (PSI)

Assessable income

250,000

Alienation of PSI: Division 86 Personal Services Entity (PSE) Trust Company 250,000

Personal Services Entity (PSE) Mr and Mrs IT

Partnership 250,000

(assume employer superannuation contribution of $25,000)

Mr IT Deductions (allowed for PSI) . Tax agent fee . Superannuation . Depreciation . Car expenses (limited Deductions PSE Deductions (additional deductions allowed for PSE)

1,000

1,000

1,000

25,000

see below

see below

2,000 5,000

2,000 See below

2,000 5,000

33,000

3,000

8,000

Disallowed Division 85

. Wages for Mr IT . Wages for Mrs IT . Superannuation Mr IT Mrs IT . Fringe benefits (car) . Interest (home) . Rates (home) . Land tax (home) . Division 43 building Additional deductions Total deductions

0,000 5,000 5,000 5,000 5,000 2,500 1,000 2,000 0,000 Nil 33,000

Taxable Income PSE Partner Mr IT Partner Mrs IT Taxable Income Mr IT

Significant reduction in PSI

217,000

Division 84 to 87 ITAA1997)

Division 84

Division 85

Deductions only No deduction allowable No deduction if PSE is a Claimed in Personal partners ITR Service Business 15,000 (PSB) 12,500 Division 1,000 87 2,000 10,000

5,500 8,500

40,500 48,500

1,500

201,500

Additional deductions

100,750

Less Super & car expenses Less Super

0,000

100,750 75,750 Less

Super

$25,000

Taxpayer claiming wages (and super) for family members and home office expenses through Trust/ Co/ Partnership

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Is the taxpayer’s earnings from “personal services” ? Division 84

Is the taxpayer’s personal services income (PSI) paid for services rendered? Division 84

Yes

Deductions for PSI are limited under Division 85, which provides a list of deductions that can/cannot be claimed.

Exceptions to Division 85

Is taxpayer is carrying on a “Personal Services Business” (PSB)? Sec 85-30. Refer to tests under Division 87

Is the taxpayers PSI received through a company, partnership or trust? Referred to as “alienation of PSI” to an entity. Division 86

Taxpayer is deemed to have received all the PSI income: Sec 86-15(1); Tax deductions are limited under Division 85 (Sec 85-10)

Exceptions to Division 86

If taxpayer is carrying on a “Personal Services Business” (PSB) Sec 86-15(3), and satisfies the tests under Division 87

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ISSUE CRITERIA •

Is it “personal services income”?

Apply law in Division 84

Division 84 What is Personal Services Income ? Personal services income is income that is mainly a reward for your personal efforts or skills: Sec 84-5(1) Only individuals can have personal services income i.e. income earned from the individuals personal exertion and work: Sec 84 – 5(2) It applies whether the income is for doing work or is for producing a Result: Sec 84-5(3) The fact that the income is payable under a contract does not stop the income from being a reward for your personal efforts or skill: Sec 84-5(4). Students: If the taxpa taxpayer yer is earning “personal services iincome” ncome” then tax deductions are limited under Division 85

ISSUE Deductions?

Division 85 Deductions you can/cannot deduct for personal services income.

CRITERIA • Deductions?

Refer to Division 85 and see list of list of expenses that you cannot deduct if your income is PSI: • You cannot deduct travel expenses from home to work: Sec 85-10 • Rent, land tax, interest, rates on your residence: Sec 85-15 • Payments to associates cannot be deducted: Sec 85-20 • Deductions for superannuation for associates cannot be deducted: Sec 25-25

What deductions CAN you NOT claim

For Example: Ruth is an architect who works as an independent contractor for one firm, She is not conducting a PSB. She has a home office, and cannot claim travel expenses from home to work, as she could not deduct them if she were an employee.(Lunney Case)

Deductions you CAN claim if you earn PSI.

What deductions taxpayers (receiving PSI) can claim? Refer to Sec 85-10(2) and see list of expenses that can be claimed. For example: • Advertising, insurance for sickness and disability insurance Exceptions to Division 85? Division 85 does not apply to Personal Service Business: Sec 85-30

ISSUE

Division 86 Alienation of personal services income?

Criteria:

Taxpayers cannot alienate PSI to Company, Partnership or Trust

Is PSI transferred to a - Company? or - Partnership? or - Trust?

Individuals cannot reduce or defer their income tax by alienating their PSI through company’s, partnerships or trust, that are not conducting a personal services business: Sec 86-10

If so, called personal service entity (PSE)

Personal services entity (PSE) is a company partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals: Sec 86-15 (2)

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Add back income of If so: “Your assessable income includes ordinary income of PSE that is your personal PSE to individuals’ services income: Sec 86.15(1) assessable income Deductions claimed by the PSE : limited to deductions that can be claimed by an individual receiving PSI, listed in Sec 86-20 Exception for PSB

Exception to Division 86 is where the PSE is conducting a personal business (PSB) Sec 86-15(3) Refer to Division 87

PSE -what deductions can/cannot be claimed ?

Tax deductibility is limited to deductions that an individual can claim. Refer to Subdivision 86-B

services

Sec 86-65(2) (b) can claim for tax related expenses Sec 86-65(3) does not include payments made to an associate; Sec 86-70 Car expenses can be claimed for which there is no private use Sec 86-70(2) can claim car expenses if there is private use providing the amount is taxable as a FBT. Sec 86-75 Superannuation can be claimed (providing conditions have been met as given in the provision.; Sec 86-85 depreciation can be claimed which is included for the purpose of producing assessable income of the taxpayer.

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Issue

DIVISION 87 Personal Services Business Refer to the diagram:

ISSUE: Is the entity a Step 1. Is there a personal services business determination? Personal Service Business? (Must apply to the Commissioner of Taxation) Sec 87-5 CRITERIA: Is there a personal service If YES: business (PSB) ?: The PSI is from a personal services business Then none of the following tests will apply. • Has a PSB determination has been applied for and accepted If NO: by the Commissioner of One of the following tests must be satisfied for Tax; or there to be a PSB • When one of the four listed tests have been satisfied: Step 2. Is the results test satisfied? è Results test è Unrelated client test è Employment test è Business premises test

NO

Refer to Step 3

YES

A PSB is being carried on no further tests apply

Step 3. 80% Test: Is 80% or more of the individuals PSI from one source?

YES: This means that the PSI is not from a personal services business refer to Division 85 and 86 (Unless taxpayer applies for a PSBD from Commissioner.

NO Then satisfy one of the following PSB tests:

Step 3a. Is the unrelated clients test satisfied? No go to Step 5 Step 3b. Is the employment test satisfied? No go to Step 6 Step 3c. Is the business premises test satisfied? No refer below:

This means that none of the above tests are satisfied, where the income is not from conducting a personal services business, and Division 85 or 86 will apply.

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STEP 1. Is there a personal services determination from the Commissioner?

STEP 2 Criteria: Results Test Will the Results Test apply? S87-18(1)

STEP 3 Criteria: 80% or more of individuals PSI Test from same entity? ISec 87-15(3) (a) and (b)

STEP 3a. Will the Unrelated clients test apply? S87-20(1) What is the criteria?

STEP 3b.

Has a personal services determination received from the Commissioner ? A personal services determination can be applied for: (Sec 87-15(1)(a) or. personal services entity (Sec 87-15(1)(b) Is at least 75% of the personal services income of the individual (S87-18(1)) or personal services entity (S87-18(3)) during the income year: (a) For producing a result; and (b) Individual or PSE is required to supply the plant and equipment or tools of trade required to complete the work; and (c) Individual or PSE is liable for the cost of rectifying defective work. Is 80% or more of the individuals PSI during the year of income from the same entity? Criteria: Individual will need to apply for a “personal services determination” from the Commissioner and meet one of the following tests:

è The results test (Sec 87-18) è Employment test; Sec 87-25 è Business premises test: Sec 87-30 Criteria for unrelated clients test: (a) Individual and PSE produces income from providing services to 2 or more entities that are not associates of each other; and (b) The service is provided as a direct result of making offers or invitations (for example by advertising) to the public to provide services. This does not apply to services provided through an entity that arranges services to be provided to a client: S87-20(2) Criteria: employment test

What is the criteria?

i) An individual or PSE engages one or more other entities to perform work which makes up at least 20% (by market value) 20% of the principals work for that year: Sec 87-25(1) or (ii) An individual or PSE will meet the test if, at least half of the year, the individual or entity has one or more apprentices.

STEP 3c.

Criteria: Business premises test

Will the Employment test apply? S87-25

Will the Business Premises Test apply? S87-30 What is the criteria?

STEP 4. Can Part IVA apply?

Individual or PSE meets business premises test, if at all times during the income year, the individual or entity uses business premises (a) At which they mainly conduct activities from which personal services income is gained or produced; and (b) Which the individual or entity has exclusive use; and (c) Is physically separate from premises that the individual or entity or any associate of the individual or entity, uses for private purposes; and (d) Is physically separate from the premises of the entity to which the individual or entity provides services. Part IVA Object of this Division The Act states that ‘the general anti-avoidance provisions of Part IVA may still apply to cases of alienation of PSI.

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