Income Splitting of Personal Services Income PSI FAQ for Medical Practitioners

Q: I have regular paid employment with the hospital but also plan to start as a contractor with other hospitals/ medical centres. My wife doesn’t work. Once the business is running, is it possible to pay my wife a wage? Also, as I will be doing most of the work, is it a no-no with the tax department to split my income?  Is setting up as family trust or company for this business a better idea?

A. The way you have described the proposed activity indicates you are likely to be the sole driver of the income-producing activity. Assuming this is the case, you may have little choice but to include the income in your own tax return. While there are clear tax advantages in allocating income to your wife, there are a few things you need to consider.
The difficult question is to work out the appropriate allocation of the income according to the contribution made by each person in earning that income, rather than just nominating an arbitrary allocation.
The ATO would not accept the situation of you simply allocating income (paying a wage) to your wife if the income arose exclusively from your personal efforts. The position would not change if you chose to operate as a trust or a company.  If your wife is genuinely contributing to earning the income in some way, that portion of the income could be reflected in her tax return.
The PSI rules can become very complicated but their broad impact is to tax an individual in respect of income derived by the company where the income relates to the personal efforts of the individual. There is a key exception to these rules where the entity derives its income from two or more arm’s length entities and not more than 80 per cent of the income is sourced from one entity.
Fundamentally, if you have multiple clients the income would not be regarded as personal services income.  This can be quite a complicated area and it is best to discuss the detail of your situation with us, including the set up and compliance costs associated with any business structure.

Please note this is GENERAL ADVICE and may not be suitable for your current situation.  For advice specific to your situation, please contact us for a complimentary consultation and meeting.

Salik Humayun CA, CTA


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