Personal Services Income (PSI): The Rules, the Tests and What You Can Claim

Personal services income is income that is mainly a reward for your personal skills or effort, rather than income produced by a business structure, assets or a team of staff. It matters because once the PSI rules apply, the deductions available to you shrink significantly, regardless of whether you operate as a sole trader, through a company, or through a trust. This guide sets out how to tell whether the PSI rules apply to you, and what changes if they do.

What counts as personal services income

Income is PSI where it is produced mainly from your personal skill or effort, typically consulting, contracting or professional services work. Income from selling goods, from a business with significant income-producing assets or equipment, or from a business genuinely staffed to deliver the work independent of one individual's effort, is not PSI. The PSI rules can apply whether you are paid directly as an individual or through a company, trust or partnership, the entity does not change the underlying character of the income.

The results test: the first and most important test

You pass the results test, and the PSI rules do not apply, where at least 75% of your personal services income for the year meets all three of the following conditions:

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  You are paid to produce a specific result, not simply for the time you work
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  You are required to supply the tools or equipment needed to do the work, where equipment is needed
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  You are liable to fix any defects in the work at your own cost, rather than being paid again to fix them

Pass the results test, and the PSI rules stop there, you do not need to consider the tests below.

If you fail the results test: the 80% rule

Failing the results test does not automatically mean the PSI rules apply, but it does mean checking one more thing first: does 80% or more of your personal services income for the year come from one client, counting that client's associates as the same client?

If yes, the PSI rules apply, and you cannot self-assess your way out using the tests below. Your only path to being treated as a personal services business is applying to the ATO for a specific PSB determination.

If no, meaning your income is spread across multiple unrelated clients with no single client at 80% or more, you can self-assess against the three tests below. Passing any one of them is enough to be a personal services business.

Tax Calculations on Personal Service Income

If you receive income that qualifies as PSI, below are the steps to calculate your tax:

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  Determine your total PSI during the financial year, including all income invoices for services provided through your business.
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  Estimate reasonable deductions related to earning PSI, such as tools, subscriptions, travel, and self-education expenses.
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  Subtract the estimated deductions from your gross PSI to calculate your net personal services income.
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  Use the ATO tax rates and thresholds tables to determine your marginal tax rate based on your total annual taxable income.
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  Calculate the tax on PSI by multiplying your net PSI by your marginal tax rate percentage.

The three self-assessment tests

Unrelated clients test

Met where your income comes from two or more clients who are not associated with each other, and the work was obtained by making offers to the public, advertising, a website, tendering, rather than through a labour-hire or placement agency registration.

Employment test

Met where at least 20% of the principal work, by market value, is performed by someone other than you, or where you have at least one apprentice for half the income year or more.

Business premises test

Met where you maintain and use separate business premises for the work, physically distinct from your home and from your client's premises, for more than half the time.

What changes once the PSI rules apply

If none of the tests above is satisfied, the PSI rules apply and several deductions become unavailable, even where the same expense would normally be deductible for an ordinary business:

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  No deduction for rent, mortgage interest, rates or land tax on the residence of the individual or an associate
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  No deduction for payments to an associate for work that is not principal work
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  Superannuation contributions for an associate who performs less than 20% of the principal work are capped at the associate's minimum super guarantee amount

The income itself is still assessed to the individual who performed the work at their personal marginal tax rate, and additional PAYG withholding obligations apply to the amount attributed to that individual.