If you’re a dentist or a medical doctor operating under your own name or through a company or trust, you may have heard of “personal service income” (PSI) and “personal service businesses” (PSBs). These terms can sound complicated, but it’s important to understand them because they affect how you’re taxed and what deductions you can claim. Below is a simplified explanation to help you navigate these rules.
1. What Is Personal Service Income (PSI)?
- Definition: Personal service income is essentially income earned mainly from your personal skills or efforts.
- Example for Dentists/Doctors: If you see patients and bill them (or if your company bills them), the money you earn from providing medical or dental services personally could be classed as PSI.
Why It Matters
- Potential Restrictions: If your income is considered PSI, tax law limits how you can split or distribute that income. For instance, you generally can’t just pay a family member or direct all income to a company at a lower tax rate unless you meet certain conditions.
- Deductions: Some business deductions might be disallowed if the ATO classifies your income strictly as PSI. For example, you might not be able to claim certain expenses if they don’t directly relate to earning your personal service income.
2. What Is a Personal Service Business (PSB)?
- Definition: A personal service business is a structure that the ATO recognises as genuinely carrying on a business, rather than just passing personal income through an entity.
- Tests to Qualify: To be treated as a PSB (and escape the stricter PSI rules), you usually need to pass one of the following tests:
- Results Test: You’re paid to produce a result, you provide your own equipment and tools, and you’re responsible for fixing your own mistakes.
- Unrelated Clients Test: You provide services to multiple unrelated clients, typically via offers to the public (e.g., advertising).
- Employment Test: You engage others to help with at least 20% of the principal work, or employ someone with special qualifications.
- Business Premises Test: You operate from business premises that you own or rent (not just a room in your house) and it’s separate from your clients’ premises.
Why It Matters
- Tax Flexibility: If you pass as a PSB, your entity (company or trust) is treated more like a traditional business. This often allows for additional deductions and can sometimes offer more flexibility in distributing income.
- Better Fit for a Group Practice: If you run (or are part of) a larger clinic with multiple practitioners, equipment, and staff, you may more easily qualify as a PSB.
3. Common Situations for Healthcare Professionals
- Solo Practitioner in a Shared Clinic
- You might rent a chair or room but still effectively be a one-person show. If all the money you earn is from your personal skills without employees or significant business structure, there’s a strong chance you’ll be considered to earn PSI.
- You can still reduce the PSI impact if you pass a PSB test (for instance, if you regularly treat many unrelated clients and advertise your services).
- Part of a Larger Practice or Company
- If you have a team of staff members (e.g., dental nurses, assistants, receptionists) who help provide services, and you invest in equipment or have your own premises, you’re more likely to be running a personal service business.
- This could qualify you for a broader range of business tax benefits.
4. What It Means for Your Taxes
- If You’re Earning PSI
- The income is generally taxed in your name, even if you funnel it through a company or trust.
- You can’t arbitrarily “split” or divert that income to family members to lower tax.
- Deductions are closely scrutinised, especially if they don’t directly relate to you earning your PSI.
- If You Qualify as a PSB
- The entity’s income can often be distributed in a more flexible way, subject to legal and professional constraints (for instance, not violating any ethical guidelines around income-sharing).
- You may claim certain business expenses that a PSI earner cannot, such as broader advertising, insurance for multiple practitioners, or hiring staff for core activities.
5. Practical Tips
- Review Your Structure:
- If you operate through a company or trust, confirm whether your setup genuinely meets PSB criteria.
- If you’re a sole practitioner, see if you can legitimately meet any PSB tests by hiring staff, broadening your client base, or establishing distinct business premises.
- Keep Good Records:
- Document client invoices, advertising activities, equipment purchases, and staff roles.
- Clear records can support your claim that you’re running a business rather than just deriving personal service income.
- Seek Professional Advice:
- The line between PSI and PSB can be tricky.
- Talk to a tax professional or accountant, ideally someone familiar with healthcare practices, to ensure you comply with ATO rules and maximise tax benefits.
Final Thoughts
For dentists and doctors, understanding the difference between personal service income and personal service business can have a big impact on how you’re taxed and what deductions you can claim. If you’re unsure about which rules apply to you, it’s best to consult a tax professional. With the right guidance and structure, you can ensure your practice is set up in a way that both meets ATO requirements and best supports your financial goals.