Most of a dentist’s income could be seen as PSI, because most of it does come from the dentist’s application of effort and skill when examining and diagnosing a patient, as opposed to the sale of a retail item. The gray area here is whether or not a dentist can be seen as conducting a personal services business or whether his personal income is subject to the PSI rule.
The flow chart of these rules is shown below as diagram:
(Click on the Image to View the Diagram)
Consequently, the government has made a set of rules designed to determine whether or not the dentist or the business is responsible for the PSI taxes. These rules are actually a series of tests. The first test is called the “results test.”
It consists of three questions: “Will your business only get paid after producing the contracted result,” “Is your business responsible for providing the tools or equipment required to complete the job,” and “Are you responsible for rectifying errors?”
The short version is, “Is the business paid according to results?” Often, the business can be paid by the job or results, but the dentist can be on a retainer or even an hourly fee. In that case, he wouldn’t be personally responsible for PSI.
If the PSI income doesn’t satisfy the results test, it goes on to another test or filter. To not be considered PSI, the business must now satisfy one of the three tests and also pass the 80% rule test. The first test is the Unrelated Clients Test.
That test is satisfied if the business in question provides services to 2 clients or more who are not associated with each other and are not associated with the medical professional. This test would obviously be satisfied in almost any medical office.
The second test is the Business Premises Test, which is satisfied if the business premises are used for business operations only, and not connected to the residence of the person who performs the services. Since medical professionals usually operate in shared rooms or hospitals, a medical business almost never satisfies this test.
The third test is the Employment Test, which is satisfied when over 20% of all income is attributed to the work of an employee who is not associated with the key individual. If an apprentice is employed for more than half of the year, it also satisfies the employment test. If the business passes one of the three tests, then it has a chance to pass the catch-all test, called the 80% Rule. If the business derives less than 80% of its income from one source or one group of associated entities, it passes. This is almost a guaranteed “pass.”
If the business satisfies all of the tests, and doesn’t pass through, then the PSI rules apply:
- Your business can’t claim any PSI deductions, and is limited to the deductions an individual tax payer would normally have. That means that you can still pay a salary to, for example, a spouse for providing administrative support, but you can’t deduct the superannuation payments you contribute to their fund.
- The PSI will need to be credited to those individuals who performed the services. In other words, the business can’t “earn” the income; only the dentist can.
- Your business may be responsible for more pay as you go (PAYG) withholding contributions. If you satisfy the test, and it is determined that you are running a Personal Services Business, the PSI rules don’t apply.
If this didn’t make a lot of sense to you, don’t worry; it doesn’t to most people who aren’t financial planners, accountants, or both. You are too busy being a dentist to have to worry about this. Call us today at 1300 657 037 or email us at firstname.lastname@example.org for a free consultation.