Personal services income (“PSI”) is income received as payment for individual personal efforts and skills. It applies to many contractors who provide services as their means of earning an income. PSI rules can apply to individual sole traders and other types of business entities, but not employees. If PSI rules apply, the entity is called a personal services entity (PSE).
The PSI rules ensure the income is attributed to the individual who performed the services and not apportioned across other entities.
There are several tests to work out if your income is PSI or if you are instead conducting a personal services business (PSB), which means the PSI rules don’t apply. If a personal services entity qualifies as a PSB, the ordinary tax rules apply for that financial year.
At least one of these four tests must be satisfied for an entity to be classified as a PSB.
- Results test: the individual must be paid to produce a result, is required to supply their own equipment and tools to produce that result and is liable for the cost of rectifying defects in the work.
- Unrelated clients test: the sole trader or entity must be engaged by unrelated clients and services must be advertised to the public.
- Employment test: in general, a sole trader or other entity must engage one or more entities to perform at least 20% of the sole trader’s principal work. Entities other than individuals must not be associated with the sole trader.
- Business premises test: the entity must maintain and use business premises to conduct personal services. The business premises must be exclusively used by the PSE and physically separate from private premises and customers.
If more than 80% of income in a financial year is derived from one customer, the PSE must satisfy the results test to be classified as a PSB.
If none of the four tests are met, the income is classified as personal services income, and the PSI taxation rules apply. PSI rules restrict the type of allowable tax deductions made in relation to personal services income-earning activities.
If you’d like to know more about PSI, talk to us to see if the services you provide meet the tests for conducting a personal services business. We’ll make sure you are claiming the maximum allowable deductions and being taxed correctly.
Automation has the capacity to revolutionise your efficiency and productivity. But how many of the automation features that are available to you are actually being used? And could you be getting more value by building automated processes into your operational framework?
Removing the manual workload to streamline your processes
There’s a very simple mantra when it comes to making the most of automation: if there’s a manual task in your business that’s taking up time, automate it now!
The more time you and your team spend on low-level administration, data-entry and form-filling, the less time you have available for actually running the business. With your software tools maximised, your automated processes can be chugging along in the background, doing the heavy lifting and freeing up your time to focus on client service, sales and strategy etc.
So, which elements of your everyday operations could you be automating? And which apps and software solutions can help you to achieve your automation goals?
Here are some areas where automation and smart systems can really help to add value:
- Automated bookkeeping and digitisation of paperwork – apps like Dext and Auto Entry offer you the opportunity to automate your bookkeeping and record-keeping. These solutions let you snap a photo of a receipt or invoice, digitise the contents and then automatically create an expense claim or bill in your accounting system. There’s no keying in and the whole process is synced with your choice of cloud accounting platform.
- Automated employee expenses – apps like DiviPay, Soldo and Pleo give you automated control over your employee expenses. Using either virtual or physical credit cards, your staff can pay for expenses and payments are then automatically synced with your main accounting platform. That means no late expenses claims, no need for petty cash and no wasted time keying in the receipts. All employee expenses can be tracked, measured and paid, with the whole expenses process automated from start to finish.
- Automated payment collection from your customers – with payment gateways like PayPal, Stripe and GoCardless you can automate your cash collection. By using a modern payment gateway, you make it easier for clients to pay their bills. But you also automate the actual cash collection and bank reconciliation process too. Money can be instantly paid to your main business account and all the transactional data pulled across to your accounting platform. That means less admin, and faster payments too.
- Automated POS, stock management and inventory – running a retail or hospitality outlet comes with a lot of operational admin. Apps like Vend or Shopify POS give you an all-in-one point-of-sale (POS), stock and inventory management system, automating your till sales and syncin g everything with your choice of accounting platform. The inventory system will also be automatically updated when an item is sold, keeping your records and stock listings completely up to date.
- Automated marketing and social media posts – digital marketing is key to finding customers and growing your business. With tools like Hubspot Marketing Automation or ActiveCampaign you can automate a large chunk of your marketing work. These solutions let you create automated email cadences, target specific customer audiences and track your return on investment (ROI) in forensic detail.
Making time to look over your financial reports each month is an important task for any business owner. If you are not taking the time to do this, either because you’re too busy or perhaps you don’t really understand what you’re looking at and it doesn’t make sense to you, then here are six reasons we recommend that you should start to.
- Understand your business better – by looking at your Profit and Loss (“P&L”) report monthly you will get a good picture of how your business is performing month by month and it will provide a better understanding of what makes up your profit. Looking at revenue and expenses clearly on one page in a monthly P&L or comparing periods, this will help to identify trends in your data and may also help to highlight anomalies in coding/categorising.
- Accurate information for lending purposes – if you are applying for a loan or an overdraft, the bank or financial institution will look closely at both your Profit and Loss report and the Balance Sheet as a lot can be learned about a business by looking at these reports together. If you are unsure what some of your balances are in your accounts, get in touch and we can explain them further.
- Get paid quicker and reduce bad debts – by looking at your Accounts Receivable Aged Summary each month you can follow up with overdue accounts promptly which often results in getting paid quicker. The longer an overdue amount is left unpaid the higher the risk of it not being paid at all, so it is important to keep on top of this.
- Better relationships with your suppliers – assuming you are entering your supplier bills into your accounting software (recommended for most businesses to get an accurate profitability figure) your Aged Payables report will alert you to any unpaid or overdue amounts. Supplier relationships are an important aspect of your business and paying on time is crucial to maintaining those relationships.
- Better cashflow – having an accurate understanding of how much money the business is owed and how much money the business owes, can help with cashflow planning to ensure that there is enough money when needed. Additionally, understanding the trends of your business, its profitability drivers, expenses, etc., can help to plan sales and marketing campaigns so that the revenue keeps coming in.
- Better business decision making – your financial reports tell the story of your business and it’s important that you understand the story that they are telling you. The better you understand what’s going on in your business the stronger position you will be in to make better business decisions that affect the profitability of your business and its financial viability.
Depending on the complexity of your business, at a bare minimum you should be looking at the following reports:
- The Statement of Financial Performance, also known as the Profit and Loss report (P&L) or the Income Statement. As the name suggests, it’s how your business is performing over a period of time, such as a month or a financial year. In broad terms it shows the revenue that your business has generated, less the expenses for that same period. In other words, it shows how profitable your business is.
- The Statement of Financial Position, also known as the Balance Sheet. This shows the value of the business’s Assets, Liabilities and Equity.
- Assets include things like money in bank accounts, Plant and Equipment, Accounts Receivable balances
- Liabilities include things like Bank loans and credit cards, Accounts Payable, and Hire Purchase balances
- Equity is the difference between your Assets and Liabilities and includes Retained Earnings and Owner Funds Introduced
- Accounts Receivable Ageing report (Aged Receivables) shows how much money is still owed to the business as at a certain date in time, and is usually segmented as to how overdue they are or sometimes by how far past the invoice date they are. Generally you will have Current, 30, 60 and 90 days columns.
- Accounts Payable Ageing Report (Aged Payables) shows who the business owes money to as at a certain date in time and, like the Accounts Receivable Ageing report, is usually segmented by overdue period.
So why bother?
If you would like to know which reports are relevant to your business and you want to better understand what’s going on in your business, then get in touch so we can make a time to go through them with you.
Your business success is important to us and we are here to help you.
If you have income from investment properties, now is the time to start gathering your records and reviewing your expenses for the 2021 financial year.
Income to Declare
All income earned from each property must be declared. If you have multiple properties, keep the records for each property separate to make the tax return more efficient.
- Rent received, whether paid directly to you or through an agent or through an online management platform. Rent includes recurring regular amounts as well as any lump sum amounts paid in advance.
- Rental bonds returned (eg. if the tenant caused damage or defaulted on rent payment).
- Insurance payouts received as compensation.
- Expenses reimbursed by the tenant (eg. if they have caused damage and you have paid for the cost of fixing the damages, or if they have reimbursed you for water).
- Extra fees received (eg. letting or booking fees).
- Government rebates (eg. installation of solar utilities).
You will need statements or recipient created tax invoices from agents or management platforms and documents for all other payments received.
Deductible expenses for property are different for residential and commercial properties. Not all expenses related to owning a property are allowed as deductions, so it’s important to check what you can claim.
- Advertising for tenants
- Body corporate fees
- Council rates
- Water supply charges
- Land tax
- Cleaning, gardening, pest control and property maintenance
- Agent fees
- Repairs and maintenance
- Some legal expenses
- Loan interest
There are some expenses which need to be claimed over a longer period such as several years or decades. These can include borrowing expenses, capital expenditure, depreciation, initial repairs and capital works.
Some expenses cannot be claimed for. These include stamp duty, loans and repayments, some legal expenses and some insurance premiums.
Get Help to Simplify Your Property Records
Tax matters for property investors can be complex. The ATO keeps a close eye on tax returns that involve property investment, as it’s easy to make mistakes. There are other matters to consider such as the period of rental availability, private use of the property, capital gains tax, legal contracts and positive or negative gearing.