PSI And Tax Treatment Of Payments To A Spouse Doing Admin Work

Q&A Tax

Question :

Mr. C is a travel consultant and has attributed PSI (Personal services income) through a company. The
company pays salaries to his wife (Mrs. C) for administration services of $20,000 per year. In FY2018,
the company makes a PSI profit of $150,000 (after deducting Mrs. C’s salary) which is fully attributed
to the husband.

Are the $20,000 salaries paid to the wife deductible when calculating the PSI profit?

Would the $20,000 salaries assessable to the wife?

 

Answer :

If the company fails the PSI tests then section 85-20 ITAA 1997 generally prevents a deduction from
being claimed for amounts paid to an associate of the individual who is performing the services. The main exception is where the associate performs principal work.

If the PSI tests are failed and Mrs. C only performs administrative work then the company cannot
claim a deduction for the salary. This means that the net PSI of the company for the year would be
higher and this should increase the amount that ends up being attributed to the client and is taxed in
their hands.

Section 85-20 also ensures that where a deduction cannot be claimed for payments made to an
associate, the associate is not taxed on the payment that they received. The tax impact of the rules is
that that amount ends up being taxed in the hands of Mr. C instead of his wife (ie, it is not double
taxed, but might be taxed at a higher rate).

In this case, The PSI attributed to Mr. C is $170,000 ($150,000 + $20,000) where the deduction of
salary paid to Mrs. C is not applicable. As the company failed the PSI test, Mr. C pays marginal
individual tax rate relating to $170,000 while his wife does not need to pay tax on the $20,000 salary
which she did not earn.

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