A PSI company is a business entity that primarily generates income from the personal skills, labor, or expertise of an individual, rather than from the sale of goods, use of assets, or its overall business structure.
Understanding Personal Services Income (PSI)
Personal Services Income (PSI) refers to income that is predominantly a reward for an individual's personal efforts or skills. This means that if over 50% of the income received for a contract or invoice is directly attributable to an individual's specific labor, skills, or expertise, rather than being generated by the utilization of assets, the sale of products, or the fundamental business structure itself, then that income qualifies as PSI.
PSI can be earned across a wide spectrum of industries, trades, and professions, highlighting its broad applicability.
How a Company Becomes a PSI Company
A company is considered a "PSI company" when a significant portion of its total income for an income year is classified as Personal Services Income. While the income is paid to the company, it is essentially derived from the personal efforts of an individual (or individuals) associated with that company.
Key characteristics often include:
- Reliance on Individual Skills: The company's revenue stream is heavily dependent on the specific abilities, knowledge, or effort of a particular individual (or a few individuals) within the company.
- Limited Asset Use: The income is not primarily generated through the use of substantial business assets or capital.
- No Significant Sale of Goods: The company's core business model does not involve the large-scale production or sale of physical goods.
- Not a Business Structure Itself: The income is not simply a return from a well-established, independent business structure that could operate without that specific individual's personal input.
Common Examples of PSI Companies
Many professions and services can generate PSI when conducted through a company structure. Examples include:
- IT Consultants: A company providing IT consulting services where the primary value comes from the individual consultant's technical expertise.
- Engineers: An engineering firm where the income is mainly from the design and analysis work performed by the lead engineer.
- Financial Advisors: A company offering financial planning advice, based on the personal knowledge and recommendations of the advisor.
- Medical Professionals: A medical practice structured as a company, where patient fees are largely for the individual doctor's medical services.
- Marketing Specialists: A company providing strategic marketing services, where the insights and creativity of the individual specialist are paramount.
Distinguishing PSI from Other Business Income
It's crucial to differentiate PSI from income generated by a traditional business that might employ many people, utilize significant assets, or sell products. The table below illustrates some common distinctions:
| Feature | PSI Company Income | Non-PSI Business Income |
|---|---|---|
| Primary Source | Individual's labour, skills, expertise | Use of assets, sale of goods, multiple employees, established business structure, capital |
| Dependence | Highly dependent on a specific individual's personal effort | Can operate independently of any single individual; relies on systems, assets, or workforce |
| Value Derived | From "doing" (e.g., advising, designing, coding) | From "producing" (e.g., manufacturing, reselling) or managing (e.g., property management) |
| Asset Use | Minimal or incidental to income generation | Integral to income generation (e.g., factory equipment, rental properties, large inventory) |
Why the Distinction Matters
The classification of income as PSI, even when received by a company, has significant implications, particularly concerning tax rules and how business deductions can be claimed. This is because tax regulations often aim to prevent individuals from structuring their personal services through a company solely for tax advantages that wouldn't be available to an individual operating as a sole trader. Therefore, specific rules apply to PSI to ensure fairness and prevent misclassification.
For more detailed information on personal services income and its implications, you can refer to government tax authority guidelines, such as those provided by the Australian Taxation Office.
