Understanding personal services income (PSI)

Are You Thinking of Becoming an Independent Contractor, Consultant or Freelancer?

If you’re embarking on a new career path, it’s important to understand the personal services income (PSI) rules. These rules can significantly affect how your income is taxed.

What is Personal Services Income?

Personal services income (PSI) is income primarily generated from your personal skills, knowledge, expertise, or efforts as an individual.

• If more than 50% of what you receive for a contract is payment for your skills, labour or expertise, the income is classified as PSI.

• PSI can apply across all industries where personal effort or skills are used — including:

  • Construction

  • IT consulting

  • Medical practice

  • Graphic design

• Income generated mainly from selling goods, using income-producing assets, or certain business structures is not considered PSI.

Examples: PSI vs Not PSI

✅ Income that is PSI:

Jodie, an IT consultant, provides systems analysis services through her company.
She enters into a contract to provide consultancy services to another company.
Since more than 50% of the payment is for her personal skills and efforts, the income is considered PSI.

❌ Income that is not PSI:

Henry, a carpenter, operates a partnership with his spouse Kim.
They design and construct bespoke furniture and sell it online and at trade fairs.
As the partnership is paid for the furniture sales, not Henry’s skills alone, this income isn’t PSI.

How the PSI Rules Affect Your Taxes

Individuals can earn PSI either:

• Directly (as a sole trader), or

• Indirectly (through a company, partnership, or trust – called a personal services entity (PSE)).

The tax treatment depends on your setup and whether you qualify as a personal services business (PSB).

If the PSI Rules Apply (and you are an individual or PSE):

• Income is treated as personal income

• Taxed at individual rates

• Some business deductions may be disallowed

If You Qualify as a PSB:

• The PSI rules don’t apply

• Income is treated as ordinary business income

• Standard business tax rules apply

How to Self-Assess as a PSB

You can self-assess as a PSB if you:

• Meet the Results Test, OR

• Meet the 80% Rule and one of the three PSB tests

✅ Results Test

You pass this if:

• At least 75% of your income is paid to produce a specific result

• You’re responsible for fixing defects

• You supply your own equipment

❌ 80% Rule

• If 80% or more of your PSI comes from one client (and their associates), you fail the rule and the PSI rules will apply.

• If less than 80% comes from one client, and you meet one of the three additional tests below, you can self-assess as a PSB.

The Three PSB Tests

1. Unrelated Clients Test
   You work for at least two unrelated clients who found you through public advertising or other promotion.

2. Employment Test
   You hire others who perform at least 20% (by market value) of the principal work that generates your PSI.

3. Business Premises Test
   You maintain dedicated business premises separate from your home for the entire income year.

If You Can’t Self-Assess

If you don’t meet the PSB criteria and don’t have a PSB Determination (which may be granted by the Commissioner of Taxation in some cases), the PSI rules will apply.

Still Unsure?

If you’ve reviewed the rules and tests but remain unsure about how they apply to you:

• Seek advice from a registered tax professional

• The ATO may also provide tailored technical advice in some circumstances