Personal Services Income (PSI): Australian Tax Essentials

If you’re a contractor, consultant or freelancer in Australia, chances are you’ve come across Personal Services Income (PSI). These rules come from the Australian Taxation Office (ATO) and can change how your income is taxed, who pays tax on it and what you can claim as deductions.

PSI isn’t about stopping you from running a business - it’s about making sure income that mainly comes from your personal skills and effort is treated correctly for tax. Once you understand the basics, you can choose the right structure, set up strong contracts and keep clean records so you can focus on delivering great work.

In this guide, we’ll cover what PSI is, how the Personal Services Business (PSB) tests work (including the 80% rule), what changes for tax and deductions, how it interacts with business structures and the key documents that help you stay compliant and professional.

This guide is general information only. Your tax position depends on your situation - it’s wise to speak with your accountant for tailored tax advice and with a lawyer for support on contracts and compliance.

What Is Personal Services Income (PSI)?

Personal Services Income is income that is mainly a reward for your personal efforts or skills. The ATO looks at the nature of each engagement, not just your business name or legal structure.

Typical PSI scenarios include work by IT contractors, engineers, creatives, management consultants, medical and allied health professionals and other specialists where clients are primarily paying for your expertise.

By contrast, income from selling goods, leasing equipment, using substantial assets or employing a genuine team to do most of the core work is less likely to be PSI. A useful question is: would the client still pay if you personally weren’t doing most of the work? If the answer is no, it’s likely PSI.

You can operate as a sole trader (with an ABN), a company or a trust - PSI can still apply. Your structure doesn’t decide it; the nature of the work does. If you’re just starting out, it helps to understand the benefits of working under an ABN so your registrations and records are set up properly from day one.

Do PSI Rules Apply To You? The 80% Rule And PSB Tests

Earning PSI is common and not a problem in itself. The key question is whether you’re a Personal Services Business (PSB) for the year. If you qualify as a PSB, most PSI restrictions on attribution and deductions won’t apply to that stream of income.

The 80% Rule (Gateway Consideration)

Look at each stream of PSI for the income year. If 80% or more of your PSI is from one client (including their associates), there are limits on which PSB tests you can self‑assess.

• You can still self‑assess the Results Test even if 80% or more of your PSI is from one client.
• If you want to rely on the Unrelated Clients, Employment or Business Premises tests and you’re over the 80% threshold, you generally need to seek a PSB determination from the ATO.

If less than 80% of your PSI comes from one client (and their associates), you can self‑assess against all four PSB tests below. You only need to pass one test to be a PSB.

The PSB Tests (Pass Any One)

• Results Test: You’re engaged to produce a specific result, you provide the necessary tools/equipment, and you’re liable to fix defects. This is the strongest test and can be self‑assessed regardless of the 80% rule.
• Unrelated Clients Test: You have two or more unrelated clients in the year and you gained that work as a direct result of making offers to the public (e.g. advertising, tenders, your website or public referrals not tied to one client).
• Employment Test: You engage one or more employees or contractors to do at least 20% (by market value) of the principal work, or you have an apprentice for at least half the year. “Principal work” means the core skilled work you’re paid to do.
• Business Premises Test: You use business premises that are mainly used for personal services work, are physically separate from your home and clients’ premises, and are used exclusively by you.

If you pass any one test, you’re treated as a PSB for that year and the stricter PSI attribution and deduction limits generally won’t apply to that PSI stream. If you don’t pass a test (and can’t obtain a determination), the PSI rules apply.

PSI often overlaps with “contractor vs employee” factors. If you’re unsure, getting tailored employee or contractor advice can help you structure engagements to reflect the reality of the work and reduce risk.

How PSI Interacts With Your Business Structure

PSI can “look through” your structure and attribute income back to the individual who performed the work in certain cases. That doesn’t mean you can’t use a company or trust; it just affects how that personal services income is taxed and what you can do with deductions or income splitting.

Sole Trader

Simple and low cost to run, with you reporting income and deductions in your individual tax return. If your income is PSI and you’re not a PSB, deductions may be limited and income can be attributed to you personally. You’ll need an ABN and to manage PAYG instalments as required.

Company

A company is a separate legal entity with limited liability and can offer credibility as you scale. If income earned in the company is PSI and PSB tests aren’t met, PSI rules may attribute income back to the individual who did the work (and limit certain deductions). If you’re serious about growth, consider a proper company set up so governance, banking and contracts support the way you operate.

Trust

Trusts can help with asset protection and tax planning in the right circumstances. However, PSI can still be attributed to the individual if you’re not a PSB. Before moving ahead, get across core trust requirements in Australia so you’re clear on compliance and administration.

Key Point On Structures And PSI

PSI doesn’t stop you from using a company or trust, but it does limit income splitting or income retention strategies for personal services work if you’re not a PSB. If you also build non‑PSI revenue (like product sales, IP licensing or a genuine team delivering principal work), your position can change over time.

Tax, GST And Deductions Under PSI

When PSI rules apply, they mainly affect two things:

• Who is taxed on the income: PSI can be attributed to the individual who performed the work, even if invoiced by a company or trust.
• Which deductions are allowed: Some “business‑style” deductions are limited unless you pass a PSB test.

PSI Attribution

If PSI applies and you’re not a PSB, the income is generally treated as your individual assessable income. Payments to associates (e.g. a spouse) for non‑principal work are usually only deductible up to market value, and payments to associates for principal work are generally not deductible under PSI rules.

Deduction Limits Under PSI

When PSI rules apply, you can still claim deductions you would normally claim as an employee doing similar work. Common allowable items include:

• Operating costs that directly help earn the income (e.g. professional indemnity insurance, software subscriptions, industry memberships).
• Home office expenses, work‑related travel and training to maintain your current skills.
• Personal superannuation contributions (subject to caps and eligibility).

Limits can apply to costs that are more “business‑like” in nature, such as rent for premises that don’t satisfy the business premises test, payments to associates for principal work and some broader marketing or outsourcing costs that don’t align with the PSI rules.

GST And PSI

PSI rules don’t change GST registration thresholds or how you charge GST on invoices. GST is a separate system. If you’re registered, you still charge GST on taxable supplies and claim input tax credits as usual.

In short: PSI affects income tax and deductions, not your GST status.

PAYG Withholding And Super

• PAYG: If you operate through a company and PSI attribution applies, make sure your PAYG withholding and payroll settings line up with salary or director fees you pay yourself.
• Super: If you pay yourself wages through a company, superannuation obligations apply in the usual way. As a sole trader, you can make personal deductible super contributions (within caps), but you don’t have employer super obligations for yourself.

Record‑Keeping And Practical Compliance Tips

Good records are essential. Keep contracts, statements of work, invoices, tender documents, proof of public advertising, timesheets, correspondence and anything that helps show you pass a PSB test (e.g. unrelated client invoices, a business premises lease or subcontractor invoices supporting the employment test).

• Frame engagements around results (where appropriate), and document responsibility for rectification and the provision of your own tools/equipment.
• Build a pipeline of unrelated clients via your website, tenders and other public offers of service.
• Document contributions by others to principal work to support the employment test.
• Use distinct, separate business premises (where viable) and document exclusive use to evidence the business premises test.

Contracts, Evidence And Risk Management For Contractors

Your contracts don’t just manage risk - they’re also key evidence if you want to self‑assess as a PSB. Clear scopes, acceptance criteria and responsibility for defects all help demonstrate the Results Test, and strong commercial terms reduce disputes.

• Contractor Agreement: Sets scope, deliverables, pricing, IP ownership, confidentiality, liability and responsibility for defects. It can be structured to support result‑based engagements.
• Consulting Agreement: Ideal for professional services and retainers, with milestones, acceptance criteria and variation processes that keep projects on track.
• Statement Of Work (SOW): A project‑specific scope under your master terms setting outputs, timeframes, testing/acceptance and fees.
• Invoice And Payment Terms: Clear payment timeframes, late fees and set‑off rights (aligned with your master agreement) reduce cash flow issues.
• IP Clauses: Confirm who owns pre‑existing IP and what the client receives on payment (licence or assignment). This avoids expensive misunderstandings.
• Non‑Disclosure Agreement (NDA): Use when scoping work or sharing sensitive information before the full contract is signed.
• Privacy Policy: If you collect client or end‑user personal information through onboarding, websites or apps, set out how you collect, store and use data in line with Australian privacy law.

If you’re growing (e.g. hiring or subcontracting), build a consistent contract suite - your master services agreement, SOW template, subcontractor terms and website terms should tell a coherent story across your business. If you plan to bring in co‑founders or investors, consider a Shareholders Agreement to define roles, ownership and decision‑making from the start.

Alongside contracts, take out professional indemnity and public liability insurance where appropriate. Many clients require it, and it’s a practical safety net.

Common Pitfalls, Timelines And When To Get Help

Your Annual Cycle

• Before each engagement: Put the right contract in place. Spell out scope, deliverables, acceptance criteria, who provides tools/equipment and who fixes defects.
• During the year: Keep evidence for PSB tests - unrelated client invoices and marketing (Unrelated Clients test), subcontractor invoices or timesheets (Employment test), lease and utilities (Business Premises test).
• End of year: Assess the 80% rule for each PSI stream. If needed, consider an ATO PSB determination for tests you can’t self‑assess due to the 80% threshold.

Common Pitfalls To Avoid

• Over‑reliance on one client: If one client accounts for 80% or more of your PSI, your self‑assessment options narrow (except for the Results Test).
• Hourly‑only engagements: Pure time‑based contracts with no responsibility for defects or tools make it harder to satisfy the Results Test.
• Weak documentation: Vague scopes, missing SOWs and no proof of public offers of service undermine PSB self‑assessment.
• Incorrect deductions: Claiming business‑style deductions that PSI rules disallow can lead to amended assessments and penalties.
• Assuming structure solves PSI: A company or trust doesn’t sidestep PSI - attribution can still apply if you’re not a PSB.

When To Get Help

It’s smart to involve your accountant at year‑end to work through PSI and PSB analysis and to set PAYG and super correctly. If you’re reshaping roles or using contractors, employee vs contractor advice will help align your contracts and operations with your tax and compliance position.

If you’re ready to scale, formalising your structure with a company set up and putting clear documents in place (from master service terms to NDAs and a Privacy Policy) can make the transition smoother and support long‑term growth.

Key Takeaways

• PSI is income mainly from your personal skills or efforts; it can apply whether you operate as a sole trader, company or trust.
• The 80% rule affects which PSB tests you can use, but you can always self‑assess the Results Test - pass any one PSB test and most PSI limits won’t apply for that year.
• If PSI rules apply, income may be attributed to you personally and some business‑style deductions are limited; GST registration and charging are unaffected.
• Contracts matter: a strong Contractor Agreement, clear SOWs, IP terms and an NDA help demonstrate PSB status and reduce disputes.
• Structure still counts for risk and growth, but PSI can look through companies or trusts if you’re not a PSB - consider a thoughtful company set up as you scale.
• If you handle personal information as part of your services, publish and follow a compliant Privacy Policy and align your practices with it.

If you’d like a consultation on PSI‑friendly contracts and setting up your contracting business the right way, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.