PSI Rules in Australia: Personal Services Income Explained

Contractors on a day rate with one main client often assume the PSI rules are for people with companies. The PSI rules in Australia turn on the income, not the structure. If 80% or more of your personal services income comes from one client and its associates, only the results test can take you outside the rules, and the ATO says being paid by the hour or the day makes its first condition unlikely to be met. Inside the rules, rent, mortgage interest, rates and land tax on a home office stop being deductible, and so does anything you pay your spouse to do the books.

The income the rules catch is taxed at the individual sole trader tax rate brackets, whichever structure it was earned through. Below is what counts as PSI, the four tests that take you out, what you lose when you fail them, and what changes when the income runs through a company.

What personal services income is

Personal services income is income “produced mainly (more than 50%) from your skills or efforts as an individual”, in the words of the ATO’s personal services income page. A consultant’s fees, a contract developer’s day rate and the labour on a plumber’s invoice can all be PSI.

The PSI rules apply to that income unless you’re running a personal services business, which is what the tests below decide. When the rules apply, two things change:

• your deductions against the PSI are worked out as if you were an employee doing the same work
• PSI earned through a company, partnership or trust is attributed to you and taxed in your own return

The ATO also lists what the rules don’t change: they don’t affect your contracts with clients (“you do not become an employee or stop being a contractor”), your ABN or GST registration, or whether you’re still running a business. Whether you’re an employee at all is a separate question with its own test, set out in subcontractor vs employee.

Income that isn’t PSI

Not every one-person business earns PSI. The ATO names three kinds of income that fall outside it, each with its own example:

• Income from selling goods: Tam the carpenter makes and sells furniture, and the payment is for the furniture, so it isn’t PSI. Materials that are only a minor part of a job don’t make it a sale of goods, though.
• Income mainly from an asset: Jack’s company supplies a 10-tonne truck and a backhoe with a licensed operator, and the income comes mainly from the equipment.
• Income from a business structure: Bella the electrician has three full-time employees, two equipped vans, a trade name and around 150 regular clients, so her income comes from the business rather than her own effort.

The personal services business tests

You’re outside the PSI rules for the year if you can self-assess as a personal services business. The ATO’s self-assessment rule gives two ways in:

• meet the results test for at least 75% of your PSI, or
• meet the 80% rule and one of the unrelated clients, employment or business premises tests.

The tests run every income year. In a company, partnership or trust they run separately for each person earning PSI, so one can pass while another doesn’t. If you can’t self-assess, the ATO can issue a personal services business determination in some circumstances. Without one, the rules apply.

The results test

At least 75% of your PSI has to meet all three conditions:

1. you’re paid to produce a specific result
2. you provide the tools or equipment the work needs
3. you fix mistakes at your own cost

The first condition is unlikely to be met by a day-rate contract. The ATO’s results test page says being paid “based on an hourly or daily rate for the work you perform” generally isn’t being paid for a result, while payment on completing a job, including progress payments and deposits, is. Billing the client for the time spent fixing your own defects fails the third condition.

The ATO’s example of a pass is Joe, who installs air-conditioning ducts for a contract price against a set of plans, brings his own tools, buys his own materials and fixes defects at his own cost. Different contracts in the same business can land on different sides of the test.

The 80% rule

If 80% or more of your PSI comes from one client and its associates, you fail the 80% rule, and the other three tests are closed to you. A client’s associates include its relatives, its business partners, trusts it benefits from and companies it controls, so a company and its subsidiary count as one client. The ATO’s example is Binglei, an IT consultant who billed ABC Pty Ltd $70,000 and its subsidiary $30,000: that’s all $100,000 of their PSI from one client, so the 80% rule fails. The rule doesn’t apply to the results test.

Commission agents get a modified rule. An agent who receives at least 75% of their income from a principal as commissions or results-based payments, actively looks for customers and doesn’t work from the principal’s premises can count the principal’s clients as their own.

The unrelated clients test

You need PSI from two or more clients who aren’t associated with each other or with you, and the work has to come from offers to the public, such as advertising, a website, competitive public tenders or a listing in a business directory or industry journal. Three common routes don’t count:

• word-of-mouth referrals, unless the industry is very specialised or niche
• work through labour hire firms or similar intermediaries
• responding to ads on recruitment websites

Repeat work from a past client has to come from that year’s offers to the public as well.

The employment test

Others have to do at least 20% of the principal work, measured by market value against the contract price, or you employ one or more apprentices for at least six months of the year, which don’t need to be continuous. Principal work is the work the client pays for. Admin and bookkeeping aren’t principal work, so the ATO’s example of a builder who pays his wife for contract administration doesn’t pass.

The business premises test

At all times in the year, you need premises that are:

• used mainly (more than 50%) for your PSI work
• used exclusively by you, which means owned or leased by you and not jointly leased
• physically separate from your home
• physically separate from your clients’ premises

An office in your home never qualifies, and neither does a room you lease at a client’s site.

What you can’t claim when the PSI rules apply

When the rules apply, the ATO’s list of deductions you can’t claim against PSI has three items:

• rent, mortgage interest, rates and land tax for your home
• payments to an associate, such as a spouse or relative, for non-principal work
• super contributions for an associate doing non-principal work

Non-principal work is the support around the job: bookkeeping, invoicing, admin and running the home office. The ATO’s examples are a financial adviser working from a room at home, who loses the rent, mortgage interest, rates and land tax, and a marketing consultant who can’t deduct the wages he pays his wife to issue invoices and run the office. The associate isn’t taxed on that payment either. An associate doing principal work is different: reasonable pay for it is deductible, though super for them is capped at the super guarantee minimum unless you pass the employment test.

Plenty stays deductible:

Where the PSI is earned through a company, partnership or trust, car expenses can be claimed for only one car in private use per person earning the PSI. Beyond these limits, each claim still has to pass the ordinary tests for small business tax deductions: it relates to earning the income, only the business share counts, and you have the records.

PSI through a company or trust

When the PSI rules apply to a company, partnership or trust, the PSI is attributed to the person who earned it. What’s attributed is the net PSI, after salary paid promptly to that person and the deductions the rules allow. The person declares it in their own return at their own marginal rates, and the company leaves it out of its assessable income so it isn’t taxed twice. The company tax rate never applies to it. A PSI loss goes to the individual too, and the business can’t use it against other income or carry it forward.

That’s the same reason a labour-only tradie gains nothing on the rate by incorporating, as sole trader vs Pty Ltd for tradies works through.

Passing a personal services business test takes the income outside the PSI rules, but it doesn’t settle where the profit can go. On 28 November 2025 the ATO released PCG 2025/5, its compliance approach where net PSI isn’t paid to the person whose services earned it, and its newsroom summary asks contractors to review their arrangements now. Where you make a genuine attempt to move to a low-risk arrangement by 30 June 2027, the ATO says it won’t seek to apply Part IVA if you’re selected for review, and that this is “not an amnesty or a safe harbour”. A genuine attempt means:

• self-assessing whether PSI has been inappropriately diverted
• dealing with the higher-risk behaviours
• making sure the current year’s return is compliant

Significant diversion may also mean correcting earlier years.

Records, and getting it right each year

Keep records for five years, and make them show which expenses relate to PSI and which to other income. The tests run every income year, so a change of clients, a new apprentice or a move to fixed-price contracts can change the answer from one year to the next.

A sole trader tax return is $330 with your personal return included, and $440 if you’re registered for GST. Fixed fees assume tax-ready records, and a spreadsheet, or your bank transactions plus a list of expenses, is a fine place to start.