What Is Personal Services Income (PSI)?

Personal services income (PSI) is income earned mainly from your personal efforts or skills. It often applies to contractors, consultants, and tradies who provide services directly. You can earn PSI as a sole trader, company, or trust, but if you're caught by the PSI rules, the Australian Taxation Office (ATO) will usually tax that income as if you earned it personally. If PSI rules apply, the entity is called a personal services entity (PSE).

What happens if you're caught by PSI rules?

If the personal services income rules apply, it can significantly change how you're taxed:

• Limits on deductions – You can’t claim common business deductions like rent, mortgage interest, rates or land tax.
• Income attribution – Most of your income will be taxed in your own name on your income tax return, not through your company or trust.
• Audit risk – The ATO keeps a close eye on PSI arrangements, so you may face greater scrutiny.

If PSI rules apply to your situation, this can result in a higher personal tax bill and fewer opportunities for income splitting or business-related tax deductions.

Example: How income attribution under PSI affects tax

Scenario:

Jordan is an IT contractor who operates through a company structure. His company invoices a single client $200,000 for the year. Jordan does all the work himself — there are no employees, no subcontractors, and the client pays him based on his personal effort and hours worked.

Jordan assumes the income belongs to the company and plans to split the income with his spouse as a shareholder, using dividends and franking credits, to reduce the family’s overall tax bill.

But the PSI rules apply.
Because Jordan:

• earns more than 80% of income from one client,
• doesn’t pass the results test,
• works alone without staff,
• and is paid for his personal effort,

The ATO determines that the income is personal services income and attributes it directly to Jordan, not the company.

Financial outcome:

• The full $200,000 is added to Jordan’s personal taxable income, not split with his spouse.
• He loses the ability to claim certain deductions through the company for rent, mortgage interest, or rates.
• As a result, Jordan moves into a higher personal tax bracket, with a marginal tax rate of 45%, rather than using a lower company tax rate of 25% or income splitting to reduce liability.

Even though Jordan operated through a company, he doesn’t employ staff, operate from business premises, or use income producing assets to generate revenue, so the ATO treated the income as if he earned it personally. This significantly increased his tax bill and removed key tax planning opportunities.

Industries commonly affected by PSI rules

PSI rules tend to affect individuals working in industries where income is closely tied to personal skills and effort, rather than a broader business operation. IT and digital contractors are frequently caught under these rules, especially those working on long-term projects for a single client. Engineers and consultants also fall into this category, as their work is often project-based and delivered by the individual rather than a team or business system.

Tradies, construction workers and even medical practitioners are another group commonly affected, particularly those who contract through a company or trust. It’s a common misconception that operating through a structure automatically keeps you safe from PSI, but in reality, the rules can still apply. What matters most is how the income is earned — if it’s mainly for your personal labour and expertise, it may be classified as PSI.

If your work involves delivering services directly and personally, rather than through a team, system, or business structure, it’s important to assess whether the PSI rules apply to you.

PSI vs. Business Income – What's the difference?

Example:

• PSI: You’re a contractor working full-time for one client through your company. You’re paid for your time and skills. That’s PSI.
• Business income: You operate a business, employ other labourers, have multiple clients, and provide results-based work. That’s a business.

What are the red flags the ATO looks for?

The ATO looks at several indicators to determine whether your income is likely to be classified as personal services income. Common red flags include:

Client concentration

• More than 80% of your income comes from a single client
• You have limited or no engagement with other unrelated clients

Business structure and staffing

• You don’t employ staff or subcontractors to help deliver your services
• You operate entirely on your own without delegating key tasks

Business premises and operations

• You don’t maintain separate business premises (e.g. you work from home or a client site)
• You don’t advertise or market your services to the public

Nature of the income

• You’re being paid mainly for your personal effort, time, or skills, not for delivering a specific result
• Your business expenses are low compared to the income you generate, indicating minimal overheads or business systems

These red flags don't automatically trigger PSI treatment, but the more that apply to your situation, the higher the risk of being caught by the rules — and attracting ATO attention.

How to stay outside PSI rules

To avoid PSI treatment, you need to pass at least one of the following tests to be classified as a Personal Services Business (PSB):

1. Results test – You’re paid to achieve a result, use your own tools and equipment, and are responsible for fixing any issues.
2. Unrelated clients test – You have two or more unrelated clients and actively advertise your services to the public.
3. Employment test – You employ others (not business structures associated to you like your company or trust) to do at least 20% of your principal work.
4. Business premises test – You maintain business premises that are separate from your home and used solely for your work.

If more than 80% of your income comes from one client, you must pass the results test to qualify as a business and avoid personal services income rules.

Need help working it out?

PSI can be complex, especially if you’re using a trust or company structure. We can help you work out whether your income is PSI, and advise on how to structure your business to stay compliant — and keep your deductions. Professional advice can make a huge difference.

Talk to us today to see if you’re meeting the tests for running a genuine personal services business.

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