A percentage of the net PSI from the previous income year, is another simplified method to report and pay PAYG withholding on PSI. You can only use this method if you had PSI in the previous income year from the one you’re currently reporting in.
You report and pay PAYG withholding based on the following formula:
net PSI percentage from previous income year × gross PSI (excluding GST) received for the period
The net PSI percentage equals:
individual's gross PSI (excluding GST) for previous income year minus
(deductions that reduced gross PSI for previous income year / business's gross PSI (excluding GST) for previous income year) x (100 /1)
Example
Kieran and Jackie are directors of Smith Pty Ltd, which reports GST and PAYG quarterly. Smith Pty Ltd provides Kieran's services as a computer consultant to a bank.
For the period 1 July to 30 September, Smith Pty Ltd received income of $16,000 (excluding GST) as payment for Kieran's services – this is Kieran's PSI. Smith Pty Ltd has paid Kieran $9,000 as salary for the work he did for the bank. Smith Pty Ltd withheld PAYG of $1,222 from his salary. Using Method 2: percentage from previous income year, Smith Pty Ltd must first work out the percentage of the previous year's net PSI.
For the previous income year Smith Pty Ltd:
- received total payments of $100,000 (GST exclusive) for Kieran's services
- received other income of $2,000
- incurred deductions (other than promptly paid salary or wages and entity maintenance deductions) of $30,000 to generate the income for Kieran's services, and
- incurred entity maintenance deductions of $5,000.
To calculate the net personal services income percentage:
- Work out, for the income year, the amount of any deductions (other than entity maintenance deductions or deductions for amounts of salary or wages paid to Kieran) to which Smith Pty Ltd is entitled that are deductions relating to Kieran's personal services income.
- Work out, for the income year, the amount of any entity maintenance deductions to which Smith Pty Ltd is entitled.
- Work out any other income that Smith Pty Ltd received that was not personal services income of Kieran (or of anyone else, if applicable).
- Deduct the entity maintenance deductions from other income received by Smith Pty Ltd first (which is $2,000 − $5,000). This leaves an amount of $3000 in entity maintenance deductions. So, total deductions that are deducted from Kieran's gross PSI are $30,000 + $3,000 = $33,000.
The net personal services income percentage for the previous income year is:
([$100,000 − $33,000] / $100,000) x (100/1) = 67%
So, the amount of Kieran's PSI subject to PAYG withholding for the period 1 July to 30 September is 67% of $16,000 = $10,720.
PAYG withholding has already been applied to the $9,000 promptly paid as salary. Additional PAYG withholding applies to the attributed income amount ($10,720 − $9,000 = $1,720).
Kieran has provided a TFN declaration and has claimed the tax-free threshold. Using the tax withheld calculator (quarterly), the amount of PAYG withholding payable is $1,573. This is made up of the:
- $1,222 of tax withheld from the salary paid to Kieran, plus
- $351 of additional PAYG withholding applicable to Kieran's PSI.
Smith Pty Ltd reports and pays these amounts in its BAS.
Smith Pty Ltd will continue to use the percentage from previous income year method to work out the PAYG withholding on Kieran’s PSI in each quarterly BAS throughout the income year.
Smith Pty Ltd will send the ATO an annual report showing the total PAYG withholding at the end of the income year.
As long as the PSI paid as salary is promptly paid and Smith Pty Ltd uses this simplified method correctly, it will not be penalised if, at the end of the income year, Smith Pty Ltd works out it withheld less tax than it should have under the legislative method.
