Understanding Personal Services Income (PSI)

What is Personal Services Income?

Personal services income (PSI) is income that is mainly a reward for your personal skills, knowledge, expertise, or efforts. If more than 50% of what you receive under a contract is for your labour, skills, or expertise, the income is considered PSI.

PSI can apply across many industries—whether you’re a construction worker, IT consultant, medical professional, or graphic designer. However, income earned mainly from selling goods, using income-producing assets, or operating through certain business structures may not be PSI.

Examples

• PSI example:
  Jodie, an IT consultant, provides systems analysis services through her company. She signs a contract to deliver those services to a client. Since more than 50% of the contract payment is for Jodie’s personal skills and efforts, the income is PSI.
• Non-PSI example:
  Henry, a carpenter, runs a furniture-making business in partnership with his spouse, Kim. They sell handmade furniture online and at trade fairs. Since the business income comes from the sale of physical products—not Henry’s personal efforts—the income is not PSI.

How PSI Rules Affect Your Tax

You can earn PSI either directly as a sole trader or indirectly through a company, partnership, or trust (known in this context as a personal services entity or PSE).

The way your income is taxed depends on whether the PSI rules apply and whether you’re considered to be operating a personal services business (PSB).

If the PSI Rules Apply

If you don’t qualify as a PSB, and the PSI rules apply, your income is treated as your personal income and taxed at individual rates. In this case, you may be restricted from claiming certain deductions.

If You Qualify as a Personal Services Business

If you meet the PSB criteria, the PSI rules won’t apply. Your income is treated as ordinary business income, and standard business deductions can apply.

How to Qualify as a Personal Services Business

To self-assess as a PSB, you must either:

• Pass the results test, or
• Pass the 80% rule and one of the three additional PSB tests.

1. Results Test

You meet this test if:

• At least 75% of your PSI is for producing a specific result;
• You’re responsible for fixing any mistakes or defects;
• You provide your own tools or equipment.

2. The 80% Rule

If 80% or more of your PSI comes from one client (including their associates), you cannot self-assess as a PSB unless you obtain a PSB Determination from the ATO.

If less than 80% of your PSI comes from one client and you meet one of the following three tests, you may still qualify as a PSB.

3. The Three Additional PSB Tests

• Unrelated clients test: You provide services to two or more unrelated clients, who found you via advertising or similar means.
• Employment test: You engage others to do at least 20% (by market value) of the principal work that generates your PSI.
• Business premises test: You maintain a dedicated business premises (not part of your home) that is used exclusively for your business.

Not Sure Where You Stand?

The PSI rules are complex. In addition, the ATO has strict rules regarding what a PSB can and can’t do with its profits.

If, after reviewing the PSI rules and working through the tests, you’re uncertain about where you stand, it’s wise to seek guidance from a registered tax professional about your position, as well as what to do with profits.