Here's a good summary of the PSI rules from: http://www.apesma.asn.au/connect/small_business/independent_operator.asp
When is a contractor an independent operator? By Roger Lee, Director Finance, Professional Update - July 2000 >From 1 July 2000 the federal government will place major restrictions on the tax effectiveness of arrangements that alienate personal services income to entities like companies, partnership or trusts. The intended effect is that income instead be assessable to the individual who provides the personal services. As we know, it's common for individuals to operate their business through a company, partnership or trust for business convenience as well as income tax effectiveness. What is a personal services or personal exertion income? Personal services income is defined as "income earned directly from the effort of a person, such as labour or skill." According to the Australian Taxation Office, income will not be considered as personal services income if the personal services are ancillary to the supply of goods or if the income is mainly from income producing assets. So why is the Australian Taxation Office concerned about individuals earning money from personal services business through a separate entity such as a company, partnership or trust? The Taxation Office is concerned when an individual earns personal exertion income and then diverts the income to a separate entity with the sole purpose of reducing income tax. This arrangement is known as "alienation of income". Alienation of personal exertion income provides an individual with: * the opportunity to split the income through the entity with other individuals * access to lower marginal tax rates * the ability to claim tax deductions for a larger range of business expenses. If an entity earns 80 percent or more of its income from one source, the Taxation Office will treat the entity for income tax purposes as if the income had been earned by the individual, and will assess the personal services income according to the personal rate of tax-unless determined otherwise by the Taxation Office. To obtain a determination from the Taxation Office that the entity is operating as a business, one of the four grounds must be given. That you: * have two or more unrelated clients * have one or more employees * have a separate business premise * are contracted to produce a result, supply own plant and equipment or tools of trade and are liable for the cost of rectifying defective work. There are exceptions to these rules. The Taxation Office has listed a few examples of exemptions. These include: * a business that takes on one long term contract will be able to seek a determination from the Taxation Commissioner if they had two or more unrelated clients in preceding years and reasonably expect to have them in subsequent years * a start up business that has only one client in the beginning may be able to seek a determination from the Commissioner if they reasonably expect to have two or more unrelated clients in subsequent years. These proposed measures will commence on 1 July 2000. As a transitional measure, contractors who are in the Prescribed Payments System as at 13 April 2000 will not be affected by the measures until 1 July 2002. However it is advisable that members affected by the proposed measures consult their accountants for advice.
