A Practical Guide to Personal Services Income (PSI)

What it is, when it applies, and why it matters for your business

As a small business owner or contractor, it can be tricky to work out how the ATO treats the income you earn—especially if most of your work relies on your personal skills or expertise. One area that often causes confusion is Personal Services Income (PSI).

This guide provides a general overview of how PSI works and the key considerations to be aware of. As always, everyone’s situation is different, so we encourage you to seek personalised advice before making any decisions.

 What Is Personal Services Income?

Income your company, trust or partnership earns may be considered Personal Services Income if more than 50% of the payment you receive for a contract is a reward for your personal effort, skills, or expertise. This is commonly known as the “mainly test.”

If more than half the income relates to your personal labour, then all income from that contract is PSI. If 50% or less relates to personal labour, none of it is PSI.

This applies whether you are paid:

• to perform work,

• to deliver a specific result,

• or through an entity such as a company or trust (known as a Personal Services Entity or PSE).

Common industries where PSI may arise include:

• IT Consulting

• Medical and allied health

• Engineering

• Financial services

• Independent consulting and advisory roles

When Income is Not PSI

Even if you perform work personally, your income is not PSI if it is generated mainly from selling goods, using significant equipment or assets, or operating a genuine business structure. Below are some general examples:

1. Income from Supplying or Selling Goods

If the main reason a customer pays you is to purchase goods (rather than your labour), the income is not PSI.
Example: A carpenter designing and selling bespoke furniture is earning income from the sale of goods, not personal services.

2. Income from the Use of an Income-Producing Asset

Where the income is driven mainly by a substantial asset rather than your skill, it is not PSI.
Example: A contractor providing a backhoe and operator is being paid mainly for use of the backhoe, not personal skill.

3. Income Produced by a Business Structure

Income is not PSI when it results from a broader business structure—such as multiple employees performing core work, significant goodwill, or substantial operating assets.
Example: A large medical clinic or accounting firm earns income from its structure and team, not from one individual’s effort.

If your income falls into one of these categories, the PSI rules generally don’t apply.

Part 2: If Your Income Is PSI – Do the PSI Rules Apply?

Once you determine you have PSI, the next question is whether the PSI rules apply. These rules can limit the deductions you can claim and may require the income to be attributed to the individual who performed the work.

However, the PSI rules do not apply if your business qualifies as a Personal Services Business (PSB).

The 80% Rule

Before applying the PSB tests, you must consider the 80% rule.

If 80% or more of your PSI for the income year comes from one client (including their associates), you cannot self-assess using most of the PSB tests. In this case, you must either:

• pass the Results Test, or

• apply to the ATO for a PSB determination.

If less than 80% of your PSI comes from one client, you may self-assess using one of the PSB tests below.

How to Qualify as a Personal Services Business (PSB)

Your business only needs to pass one of the following tests to be considered a PSB:

1. The Results Test

You must meet all of the following for at least 75% of your PSI:

• You are paid to achieve a specific result or deliverable.

• You provide your own equipment or tools.

• You are responsible for fixing any mistakes or defects in your work.

Why hourly billing is a problem

When you are paid by the hour:

• The client is paying you for your time, not for delivering a final outcome.

• The ATO sees this as inconsistent with being engaged to produce a specific result.

• It strongly indicates the contract is for personal labour, not for delivering a result.

For these reasons, hourly (or daily) rates generally fail the first limb of the Results Test.

2. The Unrelated Clients Test

You must:

• Provide services to two or more unrelated clients during the year, and

• Secure those clients from public-facing marketing such as advertising, a website, or tenders (not labour hire).

3. The Employment Test

You must either:

• Have employees or contractors who perform at least 20% of the principal work, or

• Have one or more apprentices for at least half the income year.

4. The Business Premises Test

You must use business premises that are:

• Mainly used to conduct your PSI work,

• Used exclusively by your business, and

• Physically separate from your home and your clients’ premises.

What Happens If You Don’t Meet Any PSB Tests?

If you have PSI and do not operate as a PSB:

• The PSI rules apply,

• Your net PSI may be attributed back to the individual providing the services, and

• Deductions are limited to those an employee would ordinarily claim.

This can have significant tax implications, so it’s important to ensure you have correctly assessed your situation.

Need Help Navigating PSI?

PSI can be a complex area, and the consequences of getting it wrong can be significant. If you think the PSI rules might apply to you—or you're unsure how to assess your contracts—professional advice is essential.

At Katalyst Accounting, we help business owners and contractors understand their obligations and structure their work in the most effective way.

If you’d like personalised guidance, feel free to get in touch.

Disclaimer

This blog provides general information only and does not take into account your personal circumstances. It should not be relied upon as professional or tax advice. We recommend seeking independent advice tailored to your specific situation before acting on any of the information provided.