Operating a Supported Independent Living (SIL) or NDIS business through a proprietary limited company can be a suitable business structure. However, choosing a Pty Ltd structure does not automatically mean you can retain all profits in the company and tax them at the company rate.
For SIL operators, a key tax consideration is whether the income generated by the business may be considered Personal Services Income (PSI).
The key question is whether the income mainly rewards an individual’s labour, skill, knowledge, or expertise. If so, you may need to consider the PSI rules. Perth_Tax_Accounting_SIL_PSI_Br…
At Perth Tax Accounting Co, we help SIL and NDIS operators review their business arrangements and understand the tax considerations associated with their contracts, income sources, staffing model and business structure.
PSI, PSB and Your Pty Ltd Structure
A SIL operator may legally trade through a proprietary limited company (Pty Ltd).
However, the company structure itself does not determine the tax outcome.
Tax treatment follows the substance of the arrangement. This means SIL operators should consider how their business actually operates rather than assuming that operating through a company automatically means that profits will be taxed at the company rate.
The first consideration is whether the income is primarily generated from an individual’s personal efforts, skills, knowledge or expertise.
If the income is considered PSI, the next step is to consider whether the business qualifies as a Personal Services Business (PSB). Perth_Tax_Accounting_SIL_PSI_Br…
The PSI Pathway for SIL Operators
The tax guide outlines a practical three-step pathway for considering PSI.
1. Identify PSI
The first step is to ask:
Is the income mainly generated from one individual’s labour, skill, knowledge or expertise?
If the income mainly rewards an individual’s personal services, the PSI rules may apply. Perth_Tax_Accounting_SIL_PSI_Br…
2. Check PSB Status
If the income is PSI, the next step is to determine whether the individual satisfies the requirements for Personal Services Business (PSB) status.
This involves considering the results test or another PSB test together with the applicable 80% rule. Perth_Tax_Accounting_SIL_PSI_Br…
3. Determine the Tax Outcome
If the PSI rules apply, net PSI may be attributed to the individual, and deductions may be restricted.
This is why SIL operators should review their business structure and operating arrangements before assuming that a company structure will automatically result in company-rate taxation. Perth_Tax_Accounting_SIL_PSI_Br…
PSI Is Not Determined by the Industry Label Alone
Being an NDIS or SIL operator does not automatically mean that the PSI rules apply.
Tax treatment depends on the business’s actual circumstances.
The SIL Provider Tax Guide specifically highlights several factors that may need to be considered, including:
- Contracts
- Staffing model
- Use of business assets
- Responsibility for results
- Client mix
- How services are actually delivered
Therefore, operating in the SIL or NDIS sector is not, by itself, enough to determine whether PSI applies. Perth_Tax_Accounting_SIL_PSI_Br…
Can the Company Qualify as a Personal Services Business?
If PSI applies, the next consideration is whether the business qualifies as a Personal Services Business (PSB).
The tax guide provides an overview of four statutory tests that may be relevant:
- Results test
- Unrelated clients test
- Employment test
- Business premises test
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Let’s look at each of these tests.
1. Results Test
Under the results test, for at least 75% of the PSI, the arrangement must satisfy requirements concerning:
- Payment for a result
- Tools or equipment where required
- Responsibility for rectifying defects
These factors form part of the assessment of whether the relevant income arrangement satisfies the results test. Perth_Tax_Accounting_SIL_PSI_Br…
For an SIL operator, this means reviewing the actual contractual and operational arrangements rather than relying solely on the fact that the business operates through a company.
2. Unrelated Clients Test
The unrelated clients test considers whether income is earned from two or more unrelated clients as a direct result of making offers to the public or a section of the public.
This is another factor that may be relevant when assessing PSB status. Perth_Tax_Accounting_SIL_PSI_Br…
The source guide does not state that simply having multiple clients automatically satisfies this test; the way those clients are obtained and the nature of the arrangements are relevant.
3. Employment Test
The employment test considers whether others perform at least 20% of the principal work at market value, or whether an apprentice is engaged for at least six months of the income year. Perth_Tax_Accounting_SIL_PSI_Br…
For an SIL operator, the staffing model can therefore be an important part of reviewing the business’s PSB position.
The way work is performed within the business should be considered as part of the overall assessment.
4. Business Premises Test
The business premises test considers whether the business maintains and uses qualifying premises that are:
- Separate from the individual’s home; and
- Separate from the client’s premises.
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The business premises arrangement can therefore form part of the overall review of PSB status.
Understanding the 80% Rule
The 80% rule is another important consideration when assessing whether an individual can self-assess as a Personal Services Business.
According to the SIL Provider Tax Guide, an individual must either:
- Meet the results test, or
- Meet another PSB test and have less than 80% of their PSI from the same entity and its associates.
If self-assessment is not available, a formal ATO determination may apply. Perth_Tax_Accounting_SIL_PSI_Br…
Because the application of these rules depends on the circumstances of the particular arrangement, SIL operators should have their business structure and income arrangements reviewed before making assumptions about their tax treatment.
Why SIL Operators Should Review Their Structure Before Tax Time
A company structure may suit an SIL operator, but the tax outcome depends on the substance of the business arrangement.
Before tax time, it can therefore be useful to review:
Your contracts
Review the nature of the contracts under which the business provides its services.
Your income sources
Consider where the business’s income comes from and how that income is generated.
Your staffing model
Review who performs the principal work and how the business structures its workforce.
Your PSB position
Consider whether the relevant PSB tests and the 80% rule may apply.
How the business operates
Look at the use of business assets, responsibility for results, client mix and how services are actually delivered.
These factors are specifically highlighted in the SIL Provider Tax Guide as relevant to understanding the tax position of an SIL or NDIS business. Perth_Tax_Accounting_SIL_PSI_Br…
NDIS & SIL Tax Advisory Services
If you operate a Supported Independent Living business or an NDIS-related business through a Pty Ltd company, understanding your tax position can be important before tax time.
At Perth Tax Accounting Co, we can review your:
- Contracts
- Income sources
- Staffing model
- PSB position
- Business structure
- Relevant PSI considerations
Our aim is to help you understand how the rules may apply to your particular business circumstances.
Book a Confidential Consultation
If you are an NDIS or SIL operator and are unsure whether PSI or PSB rules may apply to your business, we can review your arrangements and discuss the relevant tax considerations.
Perth Tax Accounting Co
Tax | Accounting | Business Advisory
Phone: (+618) 6162 9808
Email: [email protected]
Address: 19/328 Albany Hwy, Victoria Park WA 6100
Book a confidential consultation to review your structure before tax time. Perth_Tax_Accounting_SIL_PSI_Br…
Important Disclaimer
General information only. Tax outcomes depend on the facts and circumstances of each arrangement.