What is Personal Services Income (PSI) in Australia?

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When you’re 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’s known as Personal Services Income (PSI).

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PSI is a unique category of income recognised by the Australian Taxation Office (ATO). 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.

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Why Is It Important to Understand PSI?

Getting your PSI classification right is crucial because it impacts:

• What business deductions you can claim
• Whether income is treated as yours personally, even 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. At Trinity Accounting Practice, we help individuals and business owners navigate these rules and ensure they stay compliant with the ATO while maximising legitimate claims.

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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.

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PSI vs Business Income

Not all income is PSI. Here’s the difference:

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’re a software developer hired to write code based on your expertise, that’s PSI. If you run a firm that delivers a software solution with multiple staff and infrastructure, that’s business income.

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How to Work Out If You Earn PSI

To check if your income is classified as PSI, follow this two-step method:

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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’s likely PSI.

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2. Apply the Results Test and the 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.

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The Four Key PSI Tests

To avoid PSI rules, you need to pass at least one of these tests. If you don’t, PSI rules apply and limit what you can claim.

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1. Results Test

You pass this if:

• You’re paid for producing a result (not hourly or daily)
• You provide your own equipment or tools
• You’re liable to fix mistakes at your own cost

This is the most direct way to show you’re in business.

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2. Unrelated Clients Test

You pass if:

• You have two or more unrelated clients
• Work was gained through advertising or your own efforts (not via agencies)

This shows you’re actively marketing and not just working for one source.

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3. Employment Test

You pass if:

• You employ (or contract) others to do at least 20% of the work (by market value)
• The staff are not just administrative

This proves it’s not just your own labour being sold.

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4. Business Premises Test

You pass if:

• You maintain a business location that’s separate from your home and clients
• The premises are used exclusively for your work
• You pay for it and it’s available 365 days a 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’s earned through a company or trust
• Deductions are limited – only directly related expenses can be claimed
• You must complete extra 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.

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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 income)
• Administrative costs

You cannot claim:

• Rent, mortgage or occupancy for a home office (if PSI applies)
• Costs of a spouse or family working for you (unless they are genuinely involved)
• Super contributions for associates unless they're bona fide employees

Understanding these differences is critical in correctly managing your business finances.

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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’re running a business, not just selling your labour
• You can access full deductions like a normal business
• Income isn’t 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 PSB determination, which allows exemptions if your income is unusual for a particular year.

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Reporting PSI on Your Tax Return

If you earn PSI:

• You must disclose it on your individual or company tax return
• You’ll complete PSI-specific questions to indicate whether PSI rules apply or you’re a PSB
• For companies or trusts, income may be attributed back to the individual (unless a PSB)

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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’re not losing out on business concessions due to PSI classification

Whether you’re a freelance professional or a contractor working across multiple jobs, we guide you through the ATO’s requirements and help protect your deductions.

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Frequently Asked Questions (FAQs)

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Is PSI bad for tax purposes?

Not necessarily. But if PSI rules apply and you don’t structure correctly, you may lose deductions and pay more tax than necessary.

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Can I set up a company or trust to avoid PSI?

Using a company or trust doesn’t avoid PSI. The ATO may still treat the income as yours personally if it’s from your skills alone.

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What if I mix PSI and business income?

It’s possible to have both. You’ll need to separate each stream and apply PSI rules only to the relevant income. Accurate records are key.

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Can I still claim GST on PSI income?

Yes, if you’re registered for GST and your income qualifies. PSI doesn’t affect GST eligibility directly, but it does impact how you report income and expenses.

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What are the risks of getting PSI wrong?

Incorrect reporting can lead to:

• Disallowed deductions
• Penalties and interest from the ATO
• Unfavourable audits

That’s why proactive advice from Trinity Accounting Practice can save time, money, and risk.

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Real-World Example

Case Study: Sarah the Graphic Designer

Sarah works under her ABN for several marketing agencies. 90% of her income comes from one agency. She is paid hourly and uses their equipment. She doesn’t employ others.

✅ Her income is PSI
❌ She fails the Results, Unrelated Clients, Employment, and Business Premises tests
💼 She must apply PSI rules
📋 Her tax deductions are limited to direct expenses

Trinity Accounting Practice reviewed her situation and advised on marketing directly to new clients. Within six months, she passed the Unrelated Clients test and qualified as a PSB. Now, she can claim a wider range of deductions.

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Final Thoughts

Understanding Personal Services Income is key 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.

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Talk to the Experts

👉 Trinity Accounting Practice
✅ Accounting Firm in Beverly Hills
☎️ 02 9543 6804
📍 159 Stoney Creek Road Beverly Hills NSW 2209
🌐 www.trinitygroup.com.au
📅 Weekend & after-hours appointments available!
📅 Booking Link: https://calendly.com/ramy-hanna

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