Personal Services Income

Personal Services Income (PSI) is income that is derived from your personal exertion or skills. In simple terms, this means you provide a service and most of the revenue is due to you doing the work yourself.

Let’s breakdown what this means for you and what happens if PSI is wrongly recognised.

If the income is determined to be PSI, then the whole profit needs to be attributed to the person earning the PSI with certain costs being added back.

PSI exists as a way to reduce tax avoidance. The theory is that any income that you make using your own skill or effort should be recognised as income to the person earning the income. It basically should be paid like a salary or wage rather than as a business.

An arrangement where a structure, such as a company or a trust, to reduce tax is seen as tax avoidance and is considered a scheme under Part IVA of the Income Tax Assessment act 1936.

The consequences can be severe to both the tax payer and the tax agent if PSI is not properly attributed.

There are a few exemptions that can apply.

In order to be able to determine whether the PSI rules apply, you need to review the Personal Services Business (PSB) tests. There are 5 tests that apply, and are applied in order.

The Results Test checks if you’re paid based on completing a particular result or outcome, not just for your time. To pass this test, at least 75% of your income must come from delivering a finished product or outcome. You should also be responsible for fixing any mistakes at your own cost and use your own tools or equipment to get the job done. It’s like being paid for a completed project, rather than just clocking hours.

The 80% Rule checks if you rely heavily on a single client. If 80% or more of your income comes from one client (either directly or indirectly), PSI rules are likely to apply unless you pass one of the other tests. This rule stops people from reclassifying what is essentially an employment relationship as a business.

The Unrelated Clients Test is about having multiple clients who are not connected to each other. To pass, you need to have two or more clients who hire you because of your skills or expertise, and you often get work through advertising or an agent. This test is designed to ensure you’re running a genuine business with a variety of clients.

The Employment Test checks if you employ or hire others to help with your work. If you have employees or regularly contract out at least 20% of your work to others (who aren’t your associates, like family members), you may pass this test. This shows that you’re not just working solo but running a business that involves other people’s efforts.

The Business Premises Test focuses on where you work. To pass, you need to have a separate business location that’s used mainly for your business and isn’t your home or shared with other businesses. This shows that you have an established business base outside of just working from home or your client’s office.

If the results test applies, then the income is PSB and the PSI rules don’t apply.

If the results test doesn't apply, we move on to the 80% rule. With the 80% rule, you must also pass one of the other 3 tests. You cannot solely rely on the 80% rule. If another test isn’t passed, then the income is not PSB and the PSI rules apply.
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We will release a course with an overview on how to apply PSI in the tax returns of the tax payers.

ATO Website

Legislation - Part 2-42 of the Income Tax Assessment Act 1997

PCG 2024/D2

Tax Ruling TR 2022/3