PSI vs PSB for Doctors and Medical Professionals
Understanding the Difference Between Personal Services Income and a Personal Services Business
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Many doctors, specialists, locums and healthcare professionals operate through a company, trust or partnership. However, simply having a business structure does not automatically mean the income earned is treated as business income for tax purposes.
This is where Personal Services Income (PSI) and the Personal Services Business (PSB) rules become important.
This article provides general information only and is designed to help medical professionals understand the concepts at a high level. The application of these rules depends on individual circumstances and professional advice should be sought before making decisions.
What is Personal Services Income (PSI)?
Personal Services Income (PSI) is income that is mainly generated from an individual's personal skills, expertise, knowledge or efforts. The Australian Taxation Office (ATO) states that if income is primarily a reward for an individual's personal efforts or skills, it may be PSI.
For example:
A surgeon performing procedures
A GP consulting with patients
A radiologist providing reporting services
A specialist providing medico-legal opinions
In many cases, the income generated comes largely from the individual's professional expertise rather than from business assets or employees.
What is a Personal Services Business (PSB)?
A Personal Services Business (PSB) is not a business structure.
Instead, it is a status that may apply where certain tests are satisfied. Where an individual earns PSI but qualifies as a PSB, the specific PSI rules generally do not apply. The ATO explains that a taxpayer can self-assess as a PSB if they satisfy the relevant PSB tests.
Put simply:
PSI describes the type of income.
PSB describes whether you meet certain business tests.
The Main PSB Tests
The ATO provides several tests which may help determine whether a business qualifies as a PSB. These include:
1. Results Test
Generally looks at whether the individual:
Is paid to achieve a particular result
Provides their own tools or equipment
Is responsible for rectifying defects at their own cost
The results test is often considered the primary PSB test.
2. Unrelated Clients Test
Considers whether services are provided to multiple unrelated clients and whether work is obtained through genuine business marketing activities.
3. Employment Test
Considers whether employees or contractors perform a significant portion of the principal work. The ATO notes that this test may be met if at least 20% of the principal work is performed by others or certain apprentice requirements are satisfied.
4. Business Premises Test
Considers whether the business operates from dedicated premises that meet specific requirements.
The 80% Rule
For some of the PSB tests, the source of income also becomes relevant. The ATO explains that where 80% or more of an individual's PSI comes from one client and its associates, additional restrictions apply when self-assessing as a PSB.
Why Is This Relevant to Medical Professionals?
Many healthcare professionals work in arrangements that can vary significantly, including:
Private practice specialists
Locum doctors
Visiting medical officers
Independent contractors
Medical consultants
Allied health professionals
The PSI and PSB rules are often discussed when professionals operate through:
Companies
Trusts
Partnerships
The rules are designed to examine the substance of the arrangement rather than simply the legal structure being used.
Common Misconceptions
"I Have a Company, So PSI Doesn't Apply"
Not necessarily.
The ATO states that PSI can apply regardless of whether services are provided through a sole trader, company, trust or partnership.
"All Doctors Automatically Pass the Tests"
Not necessarily.
Each arrangement must be assessed based on its own facts and circumstances.
"PSI and PSB Mean the Same Thing"
They are different concepts.
PSI refers to the nature of the income.
PSB refers to whether specific business tests have been satisfied.
Key Takeaways
PSI and PSB are different concepts.
Having a company or trust does not automatically determine the outcome.
Many medical professionals earn PSI because their income is closely linked to their expertise and services.
Whether a professional qualifies as a PSB depends on specific legislative tests and individual circumstances.
Every arrangement should be reviewed based on its own facts.
Disclaimer
This article contains general information only and does not constitute tax, financial or legal advice. The PSI and PSB rules are complex and outcomes vary depending on individual circumstances. Professional advice should be obtained before making decisions regarding business structures or tax planning.