If your client is a contractor or consultant then you need to be aware of what is called the PSI rules (Personal Services Income rules). These rules are designed to ensure that if your client operates through a partnership, company, trust or other structure and the income derived from that entity relates to the personal skills and effort of that particular person then the income is “attributed” to them in full.
One of the common mistakes with PSI type income is how payments made to a wife are treated in relation to a deduction for tax purposes. The legislation states that you cannot claim a deduction for wages paid to a spouse unless the payment is reasonable AND in respect of principal work. If the spouse is paid for things such as answering calls while you are away, filing, bookkeeping etc then under the PSI rules any payments made to her will NOT be deductible against any PSI income you earn.
It is important to note for your client’s spouse that these payments are treated as non assessable non exempt income to her.
We have found this area of tax to be very confusing for people and as more and more people move into the contracting world it is imperative that the advice they receive as to whether they have PSI income or not and then what they can and cannot claim for tax purposes is critical.