- Personal services income is income earned mainly from your personal skills or effort, which is common for contractors, consultants and freelancers.
- The PSI rules only restrict your deductions if you fail the results test and cannot pass another personal services business test together with the 80% rule.
- If the PSI rules apply, some deductions are limited and the income is attributed to you personally, so getting the self-assessment right matters at tax time.
Personal services income, or PSI, is income you earn mainly from your own skills, knowledge or effort rather than from selling goods, using assets or running a larger business. If you are a contractor, consultant or freelancer on an ABN, there is a good chance some or all of your income counts as PSI. The rules that sit on top of it decide whether you can claim the deductions you expect, and whether the income is treated as yours personally at tax time. The concepts sound technical, but the decision you actually need to make is simple once you work through it in order.
What is personal services income (PSI)?
Personal services income is income produced mainly, meaning more than 50%, from your personal skills or efforts as an individual. The Australian Taxation Office treats it this way whether you trade as a sole trader or through a company, partnership or trust, because the test looks at where the income really comes from, not the structure you invoice under.
A quick way to sense-check it: look at a single contract and ask what the client is paying for. If more than half of the amount is for your labour, expertise or time, that contract is likely PSI. If more than half is for materials, equipment or a finished product, it usually is not.
If most of your invoices reward your effort rather than a physical output, our sole trader accounting service is built around exactly this kind of income, and the rest of this guide walks through how to classify it yourself.
What is not personal services income?
Not every dollar a contractor earns is PSI. The classification turns on what the income mainly rewards, so several common income types fall outside it.
Income is generally not PSI when it is for:
- supplying or selling goods, rather than your labour
- an income-producing asset, such as hiring out heavy equipment you own
- granting a right to use property, like licensing or royalties
- a business structure where many people and assets generate the income, not one individual
In practice, most contractors have a mix. A web developer who only bills for build hours is earning PSI. The same developer reselling hosting or hardware at a margin is earning non-PSI on that portion. You look at each contract on its own facts.
PSI vs PSB: what is the difference?
This is the distinction that trips people up, and it is the one most search queries are really asking about. PSI is a type of income. A personal services business, or PSB, is a status you can qualify for that changes how the PSI rules treat that income.
Put simply, having PSI does not automatically mean the PSI rules restrict you. If you qualify as a PSB, you self-assess as running a genuine business, and the deduction limits do not bite in the same way. If you do not qualify as a PSB, the PSI rules apply and some deductions are off the table.
So the real question is never just “is this PSI”. It is “this is PSI, so do I qualify as a PSB”. The next section turns that into a short path you can follow.
Do the PSI rules apply to you? A quick self-assessment
You can settle this in a few minutes by working through the tests in the order the ATO uses. Taking them out of order is what makes the topic feel harder than it is.
Work through it like this:
- Is the income PSI at all? If less than half of a contract rewards your effort, stop, the PSI rules do not apply to that income.
- Do you meet the results test? If you pass it for at least 75% of your PSI, you are a PSB and the PSI rules do not restrict you. You can stop here.
- Did 80% or more of your PSI come from one client? If yes, and you did not pass the results test, the PSI rules apply and you cannot self-assess as a PSB without an ATO determination.
- If no single client gave you 80% or more, you can look to the other three PSB tests. Pass any one of them and you are a PSB.
The sections below work each test as a short scenario so you can see where you land.
TIPBefore you do anything else, add up how much of your PSI came from your single biggest client this year. That one percentage decides which path you are even allowed to take, so it is worth checking first.
The 80/20 rule, explained with an example
The 80% rule, sometimes called the 80/20 rule, is the gateway. It asks whether 80% or more of your PSI in an income year came from one client (and that client’s associates).
Consider Priya, an IT contractor. She earns 90,000 dollars of PSI in the year, and 85,000 of it comes from a single company she is placed with full time. That is roughly 94% from one client, so she is over the 80% threshold. Because she also does not meet the results test, the PSI rules apply to her, and she cannot self-assess as a PSB.
Now change one fact. Priya picks up two more clients and her biggest client drops to 70% of her PSI. She is now under the threshold, which unlocks the other PSB tests. If she passes any one of them, she is a PSB. The 80% rule did not decide the outcome on its own, but it decided which door she could walk through.
The results test (worked example)
The results test is the strongest position to be in, because passing it for 75% or more of your PSI makes you a PSB regardless of the 80% rule. You meet it for a contract when three things are all true: you are paid to produce a result, you supply your own tools and equipment needed to do the work, and you are liable to fix defects at your own cost.
Take Marcus, a freelance carpenter contracted to build fitted shelving for a fixed price. He is paid on completion, brings his own tools, and has to redo any work that fails inspection at his own expense. That contract passes the results test. If contracts like this make up at least 75% of his PSI for the year, he passes the results test overall, is a PSB, and the PSI rules do not restrict him.
Contrast that with a contractor paid an hourly rate to sit within a client’s team, using the client’s equipment, with the client wearing the risk of any rework. That arrangement looks more like employment and would not pass.
The unrelated clients test (worked example)
If you did not pass the results test and you are under the 80% threshold, the unrelated clients test is often the most accessible of the remaining three. You meet it when you provide services to two or more clients who are not connected to each other, and you got that work by advertising or otherwise offering your services to the public.
Picture Dana, a marketing consultant with four clients across different industries who found her through her website and referrals. The clients have no relationship with one another, and she markets herself openly. She meets the unrelated clients test.
The part people miss is the “offer to the public” element. Winning varied work purely through a labour-hire agency or a single word-of-mouth chain may not satisfy it, even with several clients, because you were not making your services available to the public in the way the test intends.
The employment test (worked example)
The employment test looks at whether you engage others to help do the work. You meet it when you pay one or more employees, or engage contractors, to perform at least 20% (by market value) of the principal work, or you have one or more apprentices for at least half the income year.
Say Tom runs a small design studio as a sole trader and subcontracts a developer to build the sites he designs. If that developer performs at least 20% of the core client work by value, Tom meets the employment test. The key phrase is “principal work”, meaning the actual services the client is paying for, not admin, bookkeeping or reception support.
For most solo contractors this test is the hardest to satisfy, simply because they do the principal work themselves. That is expected, and it is why the other tests exist.
The business premises test (worked example)
The business premises test is about physical separation. You meet it when, throughout the income year, you maintain business premises that you use for the personal services work, that are physically separate from your home and from your clients’ premises, and that you have exclusive use of.
Imagine Sarah, an engineering consultant who rents a small dedicated office in a shared workspace, separate from her house and from any client site, which only she uses for her work. She meets the business premises test.
A home office generally will not pass, because it is not separate from your private residence. Neither does a desk you use inside a client’s building. This test tends to suit contractors who have genuinely set up a standalone place of business.
What changes if the PSI rules apply to you?
If you work through the path and land on “the rules apply”, it does not mean you have done anything wrong. It changes three things about how your tax works.
First, some deductions are limited. You generally cannot claim expenses you would not be able to claim as an employee doing similar work, such as rent, mortgage interest or rates for your home, or payments to an associate for non-principal work like basic admin. You can still claim genuine business costs like your registration fees, insurances and the running costs of gaining the work.
Second, the income is attributed to you as an individual, even if you invoiced through a company or trust. That attributed personal services income is taxed at your personal rates rather than being retained in the entity.
Third, there are reporting obligations. If you operate through an entity, the PSI is reported against you, and PAYG withholding may apply. This is the point where a contractor accountant earns their keep, because the mechanics of attributing PSI and adjusting for amounts already paid to you can get fiddly. Our tax and accounting for freelancers service exists for exactly this.
Working through an agency: does PSI still apply?
Yes, working through a labour-hire agency or recruiter does not switch the PSI rules off. What matters is still the nature of the income and whether you qualify as a PSB, not who pays your invoice.
Agency placements often fail the 80% rule, because a single placement can easily be more than 80% of your PSI for the year, and they frequently look like employment rather than a results-based contract. That combination is why many agency contractors find the PSI rules apply to them. It is not automatic, though. If you keep several unrelated placements running and market yourself independently, you may still meet the unrelated clients test.
If you are unsure how a placement affects your position, our guidance on accounts for contractors covers the record-keeping that makes this far easier to assess at year end.
How Sleek helps contractors get PSI right
Getting PSI right is less about memorising legislation and more about classifying your income correctly and keeping the records that back up your position. That is squarely what Sleek does for contractors and sole traders. Our accountants assess whether the PSI rules apply to you, handle the attribution and reporting if they do, and keep your BAS lodgements and deductions in order so you are not second-guessing your return.
If you want to understand the broader picture first, our sole trader tax rates guide and the accounting and tax FAQ hub are good next reads. When you register for GST as part of setting up, registering for GST as a sole trader walks through that step.
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Frequently Asked Questions
What are some personal services income examples?
Common examples include an IT contractor billing for development hours, a management consultant paid for their advice, a freelance writer paid per article, and a medical or engineering professional contracting their expertise. In each case the client is mainly paying for the individual’s skill or time rather than a product or the use of an asset.
What is attributed personal services income?
Attributed PSI is PSI that the rules treat as belonging to you personally, even when it was earned through a company, partnership or trust. The entity does not get to retain and be taxed on that income; instead it is attributed to the individual who did the work and taxed at their personal marginal rates.
Does PSI apply if I only have one main client?
Having one main client is exactly what triggers the 80% rule. If 80% or more of your PSI comes from a single client and you do not pass the results test, the PSI rules apply and you cannot self-assess as a personal services business. You would need an ATO personal services business determination to be treated otherwise.
Can I still claim deductions under the PSI rules?
You can still claim genuine business expenses, such as registration and licensing costs, professional insurances, and the costs of gaining the work. What you generally cannot claim are expenses an employee could not claim, like occupancy costs for your home or payments to an associate for non-principal work.
Do I still need to lodge a business activity statement if the PSI rules apply?
If you are registered for GST or have PAYG obligations, you still lodge a BAS as normal. The PSI rules affect how the income is attributed and which deductions you can claim, not whether your usual GST and PAYG reporting continues.
Is PSI the same as being deemed an employee?
No. The PSI rules are a tax measure about deductions and attribution. They do not change your legal status, your entitlements, or your relationship with a client under employment or industrial law. You can be affected by the PSI rules and still be a genuine independent contractor.
What happens if I get my PSI self-assessment wrong?
Getting it wrong can mean claiming deductions you were not entitled to, which the ATO can reverse, sometimes with interest or penalties. Because the tests turn on specific facts about your contracts and clients, it is worth having an accountant confirm your position, especially in a year where your client mix has changed.
