New ATO Guidelines on Personal Services Income (Oct 24 Tax Update)

Relevant For:

Small business owners and professionals relying on personal efforts for income generation, especially those in service-based industries.

Key Points:

• ATO draft guidelines may lead to higher tax for small businesses with Personal Services Income (PSI).
• Income classified as PSI when over 50% of earnings come from personal efforts or skills.
• The ATO flags splitting PSI through company structures as high risk.
• ATO prefers full profits taxed to the individual earning the PSI to avoid deferred tax.

Full Article:

The Australian Taxation Office (ATO) has recently introduced draft guidelines that could significantly impact small businesses reliant on personal services income (PSI).

Draft Practical Compliance Guideline 2024/D2 highlights the ATO’s stance on arrangements that might be considered high or low risk regarding PSI and tax avoidance.

PSI is defined as income where more than 50% of the earnings stem from an individual’s personal efforts or skills. This affects a broad range of professions, including but not limited to doctors, dentists, electricians, lawyers, plumbers and beauticians.

Here’s an example: