Week 4 Flashcards
What is personal services income?
Reward
Individual
Personal efforts or skills
What is meant by “mainly” in PSI and the Fowler v FCT (2008) case?
Mainly personal services incomes needs to be “chiefly”, “primarily” or “principally” a reward for the provision of the personal efforts / skills of an individual.
What are the tests for whether a person is conducting a personal services business?
Must be one of:
- Results test
- 80/20 test
OR
In PSI, what are the 3 components of the results test to determine whether or not a PSB exists?
When looking at more than 75% of revenue, the 3 below factors are met:
1. Paid to produce a result (has a degree of flexibility)
2. Required to supply plant & equipment
3. Liable for the costs of rectifying any defects.
Test is intented to exempt genuine independent contractors from PSI regime.
What is generally looked at whether a contractor satisfies the results test for PSI?
Custom + practice in the particular industry
What is a PSB?
Personal services business.
If PSI is through a PSB, then personal services legislation does not apply.
What is the 80/20 rule for PSI / PSB?
Does 80% of the individuals PSI come from one client (or associate or that entity?).
If 80% rule is not satisfied, then income will only be exempt if:
(a) unrelated clients test, OR
(b) employment test, OR
(c) business premises test.
What is the unrelated clients test within the 80/20 PSB test?
The individual / entity produces income from services to 2 or more unrelated entities;
AND
services are a direct result of offers at large to the public.
What is the employment test within the 80/20 PSB test?
Individual meets test if they engage 1 or more entities (e.g. subcontractors) to performance at least 20% of market value of the entity’s principal work.
Principal work excludes admin work, bookkeeping or answering phone calls.
Can meet employment test if you employ an apprentice for at least 1/2 a year.
What is the business premises test within the 80/20 PSB test?
Met if at all times during the year the individual/entity maintained and used business premises that:
- Gain / produce PSI
- Exclusive use
- Physically separate from domestic residences
- Physically separate from any private services.
Having shared common facilities usually means that it is NOT separate from domestic / private services.
What happens when PSI is earned and it isn’t a PSB?
If any of the 4 tests are failed, 3 consequences:
- PSI is treated as the personal income of the individual taxpayer
- PSE must withhold PAYG
- Individual is limited to claiming certain deductions.
If PSI is not through a PSB, what are deductions are limited to?
- costs of gaining work
- costs of insuring against loss of income / income earning capacity
- insuring liability for acts / ommissions (e.g. professional indemnity).
- amounts paid to employees or sub-contractors (including workcover, super and employment costs)
If more than 80% of PSI is from one source, do you fail the 80/20 test?
Yes, 80/20 test is failed and PSI regime will apply (unless the results test was previously satisfied).
What are the steps involved in calculating personal services income?
- Determine the amount of PSI deductions entitled
- Determine any entity maintenance deductions entitlement
- Determine the PSE’s other assessable income, disregarding any PSI
4.Calculate entity maintenance deductions less other assessable income.
If point 4 is positive, PSI is reduced by 1 + 4
If point 4 is negative, PSI is reduced by step 1 only
True to false:
The individual themselves is included in the definition of Personal Services Entity (PSE).
False.
PSE relates to just companies, trust or partnerships only.
PSI can still be earned by either the individual or the PSE’s above.
What division covers Employee Share Schemes?
Division 83A of ITAA97.
What are examples of Employee Share Schemes?
Shares, rights or stapled securities issued to the employee as a form of remuneration.
What are the two types of taxation treatments under Div 83A and employee share schemes?
Up-front and deferred taxation
What is the taxation treatment of a person receiving free or discounted shares from their employer?
Tax on the discount in the year they acquired the interest.
Assessable income = market price less price actually paid.
Shares only. Does not apply to rights if certain conditions are met.
Assessable amount of the discount is reduced by $1,000 if adjusted taxable income does not exceed $180,000 (certain conditions must be met).
What conditions must be met for an ESS upfront taxation be reduced by $1,000?
- ESS scheme must relate to ordinary shares only
- Employee must be employed by the company group providing the ESS
- Scheme must be offered to at least 75% of permanent employees with 3 or more years service
- Employee must be required to hold for more than 3 years
- Shares / rights are not at real risk of forefeiture
- Employee must not receive more than 10 per cent ownership / control of company.
What is the taxation concessions for start-up companies?
Shares acquired on or after 1 July 2015, if from a eligible small start-up company.
Discount on the shares is not included in asessable income upfront. Subject to CGT when sold or transferred.
Rules for eligible start-up companies:
- Not ASX listed
- Aggregated turnover of less than $50 mil in previous income year
- Resident of Australia
- Incorporated less than 10 years
- Discount provided can not exceed 15% of market value.
When does deferred taxation apply to ESS?
When:
- ordinary shares and a risk of forefeiture
- acquired under a salary sacrifice arrangement and no more than $5,000 in year
- ESS restricts employee from immediately disposing
When is the deferred taxing point for ESS?
For shares, earliest of:
- No real risk that employee will lose the share
- 15 years have elapsed since the employee acquired the share.
For rights, earliest of:
- You have not exercised the right
- No real risk of forefeiture
- the scheme genuinely restricted you from disposal.
What reporting obligations do employers have when a taxing point is reached for ESS?
Must issues a employee share statement (similar to PAYG statement) to any employees issues shares at a discount and had a taxing point during the year.
