Personal Services Income (PSI): What You Need to Know This Tax Season

Are you a contractor, freelancer or sole trader who’s been caught off guard at tax time? Maybe you’ve had deductions knocked back or found yourself facing unexpected personal tax?

If your income is based mostly on your own skills and effort, you might be dealing with something called Personal Services Income (PSI). It’s more common than you’d think.

Let’s break it down and help you get on top of it before it causes any more tax season stress.

What is Personal Services Income?

Personal Services Income (PSI) is income that comes mostly from you – your knowledge, skills or effort. That includes tradies, consultants, engineers, creatives, IT specialists and other service-based professionals. If more than half of what you earn from a job comes from your labour, not products or equipment, the ATO may classify it as PSI.

Even if you operate through a company, trust or partnership, you can’t use those structures to split income or claim extra deductions if the income is still really just you doing the work.

The ATO has specific PSI rules that are designed to stop individuals from using business structures to reduce tax when the work is essentially personal. You can read more about how the ATO defines PSI on their website here.

Does Personal Services Income Apply to You?

Ask yourself:

• Do you mostly earn money from your own effort, not products or staff?
• Does more than half of the money from a job come from you doing the work?

If yes, personal services income probably applies and you’ll need to dig deeper to see how the rules affect you

The 80% Rule: Are You Eligible to Self-Assess?

Before jumping into any tests, there’s one rule to check first.

If 80% or more of your income comes from one client (or one source), you’re not allowed to self-assess. You’ll need to apply to the ATO for permission to be treated as a Personal Services Business (PSB).

This is especially common for people working through agencies. Even if you have multiple end clients, the ATO may treat the agency as your only source of income.

If you earn less than 80% of your PSI from one client or source, you’re free to self-assess using the next section.

The Four PSB Tests (and What They Really Mean)

If personal services income applies and you pass at least one of these four tests, the special PSI rules won’t apply. That means you can keep your structure, claim deductions as usual and get on with business.

Here’s what each test looks like.

1. Results Test

This one’s tough to pass unless you’re project-based. To qualify, you need to:

• Be paid to deliver a result (not by the hour or day).
• Provide your own equipment.
• Cover the cost of fixing mistakes.

Most people working under hourly contracts or through agencies won’t pass this test.

For the full ATO criteria and examples, read more about the Results Test on their website.

2. Unrelated Clients Test

You’ll need to:

• Earn income from at least two unrelated clients.
• Win the work through advertising, tenders or your own promotion (not just word-of-mouth or agency placements).

If you land gigs directly from your own efforts, this might be your path.

You can read how the ATO defines unrelated clients and acceptable forms of promotion on their Unrelated Clients Test page

3. Employment Test

This test is for those who have help. You need to:

• Employ someone who isn’t an associate (not your partner or family).
• That person must do at least 20% of the actual service work.

Admin staff or bookkeepers don’t count unless they’re doing the core paid work.

For more detail, including examples of qualifying work, visit the ATO’s Employment Test section.

4. Business Premises Test

You’ll need to:

• Run your business from a dedicated location.
• Not shared with your home or clients.
• That you own or lease exclusively.

A home office or shared co-working space generally won’t pass.

To see what does and doesn’t qualify, you can read more on the ATO’s Business Premises Test webpage.

What If You Don’t Pass a PSB Test?

Here’s what happens if you’re caught in PSI territory without a way out:

• Your income is taxed to you personally (not through your company or trust).
• You lose access to some deductions, particularly if they relate to your structure or home office.
• The ATO might flag your setup, especially if you’re trying to claim deductions you’re not entitled to.

Examples of deductions you can’t claim:

• Home office rent, mortgage interest or land tax.
• Wages or super for family members doing admin.
• Marketing costs paid to related parties.

What you can still claim:

• Tools, equipment, insurance or travel costs directly related to earning income.
• Super contributions for yourself.
• Payments to unrelated contractors or employees doing the actual service work.

You’ll find a full list of what you can and can’t claim under the PSI rules on the ATO’s deductions and expenses page.

Don’t Let Personal Services Income Catch You Off Guard

The personal services income rules aren’t a punishment. They’re just a set of guidelines. But if you’re not aware of them, they can mess with your tax return and reduce the benefits of using a business structure.

Our accountants work with contractors, sole traders and consultants to:

• Figure out if PSI applies to them.
• Restructure for better outcomes.
• Apply for ATO determinations where needed.
• Stay compliant while making the most of their setup.

If you think PSI might be affecting your tax outcome or you’ve already lost deductions you thought you were entitled to, now’s the time to act.

Contact our team or book a chat with one of our tax specialists today.

Source: Personal Services Income, Australian Taxation Office (ATO).