What is Personal Services Income (PSI) in Australia? The Complete Guide
Introduction
When you are a sole trader, contractor, consultant, or operate through a company or trust and most of your income comes from your personal efforts or skills rather than selling products or assets, you may be earning what is known as Personal Services Income (PSI).
PSI is a unique category of income recognised by the Australian Taxation Office. It applies to situations where the income is generated primarily by your personal labour, skills, or expertise, not from employing others or leveraging business systems.
Getting your PSI classification right is crucial, and at Trinity Accounting Practice, we help individuals and business owners navigate these rules to stay compliant while maximising legitimate claims.
Why Is It Important to Understand PSI
Getting your PSI classification right matters because it impacts:
- What business deductions you can claim
- Whether income is treated as yours personally, even if earned through a company or trust
- How you report income and manage your tax affairs
Incorrectly applying PSI rules could result in audits, denied deductions, and penalties.
Common Examples of PSI
Here are common professions that often generate PSI:
- Freelance graphic designers
- Independent IT consultants
- Engineers offering services under their name
- Contract bookkeepers
- Medical professionals doing locum work
- Construction workers hired for personal skill, not a team
If more than 50% of the income from a contract is based on your personal skills, knowledge, or effort, it is likely to be PSI.
PSI vs Business Income
Not all income is PSI. The key difference is how the income is generated:
PSIBusiness IncomeEarned from your personal effortComes from selling goods, equipment, or employing othersUsually applies to sole traders or one-person contractorsInvolves a team, intellectual property, or systemsLimits on deductions applyBroader range of deductions allowed
For example, if you are a software developer hired to write code based on your expertise, that is PSI. If you run a firm that delivers a software solution with multiple staff and infrastructure, that is business income.
How to Work Out If You Earn PSI
To check if your income is classified as PSI, follow this two-step method:
Step 1: Identify Each Contract or Job
Break down your work into contracts or agreements. For each one, ask:
- Did more than 50% of the income come from my personal skills, expertise, or efforts?
- Were the results tied to me as an individual?
If yes, it is likely PSI.
Step 2: Apply the Results Test and PSI Rules
Once you identify PSI, the next step is to test whether you pass any exemptions from PSI rules. This determines if you can be treated as a Personal Services Business (PSB) and access full business deductions.
The Four Key PSI Tests
To avoid PSI rules applying, you need to pass at least one of these tests. If you do not pass any, PSI rules apply and limit what you can claim.
1. Results Test
You pass this test if:
- You are paid for producing a result, not on an hourly or daily basis
- You provide your own equipment or tools
- You are liable to fix mistakes at your own cost
This is the most direct way to demonstrate you are operating a genuine business.
2. Unrelated Clients Test
You pass this test if:
- You have two or more unrelated clients
- Work was gained through advertising or your own efforts, not solely through agencies
This shows you are actively marketing your services and not dependent on a single source of income.
3. Employment Test
You pass this test if:
- You employ or contract others to do at least 20% of the work by market value
- The staff are not just performing administrative duties
This proves it is not just your own labour being sold.
4. Business Premises Test
You pass this test if:
- You maintain a business location that is separate from your home and your clients' premises
- The premises are used exclusively for your work
- You pay for the premises and they are available throughout the year
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What Happens If You Fail All PSI Tests
If you fail all four tests, the PSI rules apply. This means:
- Income is treated as your personal income, even if it is earned through a company or trust
- Deductions are limited to only directly related expenses
- You must complete additional labels in your tax return
- You must show the PSI portion and explain how it was earned
This is where Trinity Accounting Practice can help you structure your work and contracts better, ensuring compliance while maintaining tax efficiency.
Deductions You Can and Cannot Claim Under PSI
When PSI rules apply, allowable deductions become restricted.
You Can Still Claim
- Accounting fees
- Registration costs
- Work-related training
- Certain travel and equipment if directly linked to earning income
- Administrative costs
You Cannot Claim
- Rent, mortgage, or occupancy costs for a home office if PSI rules apply
- Costs of a spouse or family member working for you, unless they are genuinely involved in the business
- Super contributions for associates unless they are bona fide employees
Understanding these differences is critical in correctly managing your business finances and ensuring your bookkeeping accurately separates deductible and non-deductible expenses.
What Is a Personal Services Business (PSB)
If you pass one of the four PSI tests, you qualify as a Personal Services Business (PSB). This means:
- You are running a business, not just selling your labour
- You can access full deductions like a normal business
- Income is not forced back onto your personal return
- You may structure through a company or trust more flexibly
Even if PSI applies, you might be eligible for a PSB determination, which allows exemptions if your income circumstances are unusual for a particular year.
Reporting PSI on Your Tax Return
If you earn PSI:
- You must disclose it on your individual or company tax return
- You will complete PSI-specific questions to indicate whether PSI rules apply or you qualify as a PSB
- For companies or trusts, income may be attributed back to the individual unless a PSB determination applies
Case Study: Freelance Graphic Designer
Sarah works under her ABN for several marketing agencies. However, 90% of her income comes from one agency. She is paid hourly and uses their equipment. She does not employ others.
Her income is PSI. She fails the Results Test, the Unrelated Clients Test, the Employment Test, and the Business Premises Test. PSI rules apply, and her tax deductions are limited to direct expenses only.
Trinity Accounting Practice reviewed her situation and advised her to market directly to new clients. Within six months, she passed the Unrelated Clients Test and qualified as a PSB. She can now claim a wider range of deductions and has greater flexibility in how she structures her tax affairs.
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How Trinity Accounting Practice Helps With PSI
At Trinity Accounting Practice, we specialise in helping professionals across industries understand and manage PSI obligations. We assist with:
- Reviewing contracts and client relationships
- Determining PSI and PSB eligibility
- Structuring income to ensure compliance
- Managing deductions, lodgements, and tax planning
- Ensuring you are not losing out on business concessions due to PSI classification
Whether you are a freelance professional or a contractor working across multiple jobs, we guide you through the requirements and help protect your deductions.
Our business advisory team can also help you restructure your work arrangements to achieve PSB status where possible, opening up access to the full range of business deductions.
Frequently Asked Questions
Is PSI bad for tax purposes?
Not necessarily. But if PSI rules apply and you do not structure correctly, you may lose deductions and pay more tax than necessary.
Can I set up a company or trust to avoid PSI?
Using a company or trust does not avoid PSI. The ATO may still treat the income as yours personally if it is generated from your skills alone.
What if I mix PSI and business income?
It is possible to have both. You will need to separate each stream and apply PSI rules only to the relevant income. Accurate bookkeeping records are essential.
Can I still claim GST on PSI income?
Yes, if you are registered for GST and your income qualifies. PSI does not affect GST eligibility directly, but it does impact how you report income and expenses.
What are the risks of getting PSI wrong?
Incorrect reporting can lead to disallowed deductions, penalties and interest, and unfavourable audit outcomes. Proactive advice from an experienced accountant can save you time, money, and risk.
Conclusion
Understanding Personal Services Income is essential for many Australian contractors, freelancers, and consultants. If most of your income relies on your effort and skill, PSI may apply. But with the right structure, support, and planning, you can stay compliant and make the most of your tax position.
For professionals who need broader strategic financial oversight, our Virtual CFO division, VCFO Australia, provides budgeting, forecasting, and compliance support for growing businesses.
If you need finance to support your business growth or personal goals, our mortgage brokerage division, Nexus Wealth Partners, can assist with home loans, refinancing, and business finance.
Book a consultation with Trinity Accounting Practice to review your PSI position today.
Trinity Accounting Practice
Accounting Firm in Beverly Hills, Sydney
Phone: 02 9543 6804
Address: 159 Stoney Creek Road, Beverly Hills NSW 2209
Website: www.trinitygroup.com.au
Weekend and after-hours appointments available
Our Virtual CFO division, VCFO Australia, provides strategic financial management, budgeting, forecasting, and compliance support for growing businesses and not-for-profits.
Learn more about what we offer
Discover the industries we specialise in
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Our mortgage brokerage division, Nexus Wealth Partners Pty Ltd, assists clients with home loans, refinancing, and business finance.
Disclaimer: Information provided on this website is intended as a general overview only and does not replace professional advice tailored to your personal circumstances.
