Many consultants and contractors operate as sole traders. In many cases, the income they receive for the work they do may be classified as Personal Services Income (PSI).
To determine if you are receiving PSI, you will need to look at the income from each contract you complete, and work out what percentage of the payment is for:
- your skills, knowledge, expertise or efforts – that is, the labour component, and
- the materials supplied and/or tools and equipment you use to complete the job.
If you work out that:
- more than 50% of the income received is for your skills, knowledge, expertise or efforts, then the income for that contract is PSI
- 50% or less of the income received is for your skills, knowledge, expertise or efforts, then the income for that contract isn’t PSI.
Your income can be a mixture of PSI and other income.
If you are a contractor, you will generally provide for your tax obligations through the pay as you go (PAYG) instalments system.
PAYG instalments is a system for paying instalments towards your expected tax liability on your business and investment income for the current income year. Your actual tax liability is worked out when your annual income tax return is assessed. Your PAYG instalments for the year are credited against your assessment to determine whether you owe more tax or are owed a refund.
If you don’t quote your Australian business number (ABN), either in a PAYG withholding voluntary agreement or on your invoice, the payer will be obliged to withhold tax from your payment.
If some or all of your income is PSI, you need to be aware of the different tax arrangements that apply to this form of income.
If you mainly supply labour as part of your contract work for a payer (more than 50% of the value of the contract is for labour) the payer is also required to make super guarantee contributions for you.
As a rule of thumb, if you need to spend money to earn income, you can usually claim it – either as an immediate deduction, or over time.
The ATO has prepared a youtube clip about deductions:
To make a deductions claim, you must have made the purchase in the course of earning your assessable (taxable) income, and it must not be a private, domestic or capital expense.
You can claim vehicle and other travel expenses directly connected with your work, but you can’t claim for normal trips between home and work – this is considered private travel.
You can claim a deduction for the cost of buying and cleaning occupation-specific clothing, protective clothing and unique distinctive uniforms.
You can only make tax-deductive gifts or donations to organisations that have the status of deductive gift recipients (DGRs).
You may be entitled to claim deductions for home office expenses, but you must keep records. Running costs may be deductible. Occupancy costs are generally not deductible for an employee.
You can claim a deduction if you are able to show that you incurred expenses earning interest, dividend or other investment income.
You may be able to claim a deduction for self-education expenses if your study is work-related or if you receive a taxable bonded scholarship. In some circumstances, you have to reduce the amount of your claim by $250.
If you buy tools, equipment or other assets to help earn your income, you can claim a deduction for some or all of the cost.
You may be able to claim other deductions not previously mentioned. Basically, within reason, if you need to spend money to earn income, you can usually claim it – either as an immediate deduction, or over time.
ATO (PSI Income)