Working for yourself as a contractor or freelancer in Australia is awesome, right? Being your own boss is great, but Aussie tax stuff can get tricky, especially when it comes to your earnings. One thing that often catches solo flyers and small businesses out is figuring out your personal service income. Getting this bit wrong can mean unwanted surprises and headaches from the ATO, like unexpected tax bills or even tax penalties.
So, it’s super important to know if the money you make is considered personal service income. This helps you pay the right amount of tax and get your tax return spot on. If you don’t get your PSI reporting right, the tax office could make some hefty changes later on, and no one wants that kind of stress!
What exactly is personal service income?
Personal service income meaning, often shortened to PSI, is income produced mainly from your personal skills or effort as an individual. Think about what you are actually paid for when providing personal services. If the income received is mostly for your labour, skills, knowledge, or expertise—your personal efforts—it’s likely PSI.
This is different from income generated primarily from using an income-producing asset, selling goods, or the structure of a larger business. For example, income from owning a rental property, dividends from shares, income from a software licence you own, or selling products online is generally not considered PSI; this might be non-psi income.
Many professions commonly earn PSI. This includes professionals like a management consultant operating through their own company, information technology specialists, engineers, medical practitioners, accountants, and construction workers operating as a sole trader or through a company or trust services entity. The ATO website gives examples of common situations where service income is classified as PSI.
How do I know if my income is PSI?
Just because you run your services business through a company or trust doesn’t automatically mean your income isn’t PSI. The ATO looks at the substance of your working arrangements to determine if the income produced fits the definition. There are specific tests, the PSI rules, to figure out if the special income rules apply to your personal services income.
First, you need to work out if more than 50% of the income you received for a specific contract or job was for your labour, skills, or expertise. If it was, that specific income is likely PSI. Then you apply a series of tests established by the Australian Taxation Office to see if you are conducting a personal services business (PSB) or if the limiting PSI rules apply.
Understanding whether you earn PSI is the first step before navigating the specific tests.
The results test
This is the primary test for being considered a personal services business (PSB), meaning the restrictive PSI rules don’t apply. You pass the results test for an income year if, for at least 75% of your PSI from your services income, you can answer ‘yes’ to all three conditions below for each relevant contract.
- Were you paid to produce a specific result for completed contracts? This means payment is typically linked to achieving a defined outcome (e.g., delivering a finished report, installing specific equipment), not just for the hours you work.
- Did you need to provide your own significant equipment or tools to do the work? This doesn’t usually include basic items an employee might use (like a standard laptop if provided by the client) but refers to substantial tools essential for the job (e.g., a tradesperson’s specialised tools, a graphic designer’s high-end computer and software licence).
- Are you liable for fixing any defects in your work? This means you bear the commercial risk and cost of rectifying faulty work, demonstrating independence unlike a typical employee.
If you meet the results test for 75% or more of your PSI, the PSI rules don’t apply, and you can generally claim tax deductions like a regular small business. You don’t need to apply the other tests if you pass this one. More details on this crucial test are available from the ATO results test page.
Failing this test means you must proceed to the next set of tests.
The 80% rule
If you don’t pass the results test, you must consider the 80% rule (also known as the 80/20 rule). This rule examines the source concentration of your PSI. Does 80% or more of your personal service income in an income year come from just one client, including their associates?
If yes, the PSI rules will generally apply to that income. You won’t be considered a PSB for that income year based on the remaining tests unless you obtain a specific PSB determination from the ATO. The psi rules apply directly in this scenario without needing to check further tests.
If no (meaning your income is spread across multiple unrelated clients, with no single client contributing 80% or more of the PSI), you can then look at the remaining tests: the unrelated clients test, the employment test, or the business premises test. Passing just one of these is sufficient if you satisfy the less than 80% condition.
The unrelated clients test
You pass this test if you receive PSI from two or more clients who are not related or connected to each other, nor connected to the individuals providing the personal service. These clients must have hired you directly as a result of you making your personal services available to the general public or a section of the public. Activities like advertising online, having a professional website showcasing your services, or listing in a directory demonstrate making services publicly available.
Having a separate contract for each client engagement is important. Even if work is ultimately performed for the same end-user but secured through different, unassociated agencies, these can count as unrelated clients provided the contracts were obtained through your public offer of services.
The critical factor is actively marketing and being available to provide personal services to a range of potential clients. You can find more guidance on the ATO’s unrelated clients test page.
The employment test
You can pass the employment test in one of two ways related to engaging others in your services business. The first way is if you employ one or more other individuals (who are not your associates, like immediate family, unless they are performing principal work), and they perform at least 20% (by market value) of the principal work that generates your PSI. The principal work is the core service clients pay for, not just administrative or support tasks like invoicing or bookkeeping.
The second way to pass is by having one or more apprentices for at least half of the relevant income year. Simply employing family members to perform minor incidental tasks doesn’t meet the requirements of this test. The focus is on substantial contribution to the core income-earning activities.
For further clarification, read more on the ATO employment test guidelines.
The business premises test
To pass this test, your personal services entity must maintain and use business premises throughout the income year (or the part of the year you conducted the business). These premises must meet several criteria simultaneously. They must be physically separate from your private residence and the premises of your clients and their associates.
Crucially, these premises must be used mainly (more than 50% of the time) for conducting the activities that earn your PSI. Additionally, you must have exclusive use of these premises.
A home office typically doesn’t qualify unless it meets strict conditions, such as having a separate entrance, being exclusively used for the business activities, not being readily accessible from the private areas of the home, and presenting a professional business image. Check the detailed ATO business premises criteria for absolute clarity.
Helpful Read - Cost of a Tax Accountant in Australia
Still unsure?
Determining your status regarding PSI rules can feel complicated. The Australian Taxation Office offers a PSI decision tool online which can help guide you through the tests based on your specific work situation. It asks a series of questions about your income and working arrangements to help classify your income.
Hiring a freelance account to help you determine whether or not you are likely to earn PSI and if the restrictive income rules might apply.
What is attributed personal services income?
Heard the term ‘attributed personal services income’ and wondering what on earth it means? No worries, we’ll break it down for you! Think of it like this: if you earn income from your personal skills or efforts through your company or trust, and the special PSI rules apply, that income often has to ‘go back’ to you personally for tax reasons. That’s what we mean by ‘attributed’—i’t’s pointed back to you, the individual who did the work.
This usually happens when your business structure (like your company) isn’t classified as a Personal Services Business (PSB). The ATO wants to make sure that income earned from your personal work is taxed in your hands, not just kept in the company to pay less tax or split it in ways that aren’t allowed. So, even if your client paid your company, this ‘attributed personal services income’ is the amount that gets added to your personal services income tax return, and you’re the one who pays tax on it.
Personal services income rules
Okay, so you’ve checked things out (maybe even used that handy ATO tool) and it looks like your income is PSI, but your business doesn’t quite make the cut as a Personal Services Business (PSB). What happens next?
Here come the PSI rules (and what they mean for you)
This is where the special PSI rules start to apply. The main thing they change is what personal service income deductions you can claim against that income.
Basically, these rules are in place to make sure everyone pays their fair share of tax. They stop people from trying to lower their tax by splitting income with family or claiming business deductions that employees can’t get, just by using a company or trust.
What deductions get limited?
When the PSI rules apply, you’ll find that some common business deductions are off-limits for that income. For example, you generally can’t claim:
- Expenses for running a home office like rent, mortgage interest, rates, or land tax.
- Payments to family members (like your spouse or children) for doing admin or support tasks that aren’t the main work you’re paid for (non-principal work).
So, what can you usually claim?
Think of it like this: the deductions you can claim are often similar to what an employee could claim. This usually includes things directly tied to earning your income, like:
- Fees for professional memberships or registrations.
- Specific travel costs for your work (like driving between job sites).
- Income protection insurance.
(The ATO website has more detailed info on this too!)
Where does the profit go? (if you use a company or trust)
If you’re using a company or trust and the PSI rules apply, any profit made from your personal services (after the allowed deductions) has to go back to you – the person who actually did the work.
This means you’ll need to declare that income on your personal tax return for that year. Your company or trust can’t hold onto that PSI profit.
Don’t forget PAYG and super!
When you earn PSI (that’s you!), there are also important rules about PAYG withholding (the tax taken out) and paying super for yourself. These are linked to how your PAYG payment summary business and personal services income is handled and reported. These obligations make the tax situation look a bit more like an employer-employee setup, even if it’s within your own business structure.
What is the personal services income tax rate?
Here’s the main thing to know: there isn’t a special, separate tax rate just for Personal Services Income in Australia.
Instead, if the PSI rules apply to your income and it gets attributed to you (meaning it’s treated as your personal income, even if a company or trust received it initially), that income is simply added to any other taxable income you have for the year. Then, your total taxable income is taxed at your usual individual marginal tax rates.
Think of it like this: the PSI just becomes part of your overall income, and the standard tax rates that apply to everyone else also apply to you.
What are the usual tax rates?
The Australian Taxation Office (ATO) sets the income tax rates for individuals, and these can change. For example, for Australian residents for the 2024-25 income year, the general tax rates are:
- $0 – $18,200: 0% (tax-free threshold)
- $18,201 – $45,000: 16% for every $1 over $18,200
- $45,001 – $135,000: $4,288 plus 30% for every $1 over $45,000
- $135,001 – $190,000: $31,288 plus 37% for every $1 over $135,000
- $190,001 and over: $51,638 plus 45% for every $1 over $190,000
(These rates don’t include the Medicare levy, which is currently 2% for most taxpayers.)
It's always a good idea to check the latest information on the ATO website as tax rates and thresholds can be updated.
Personal services income vs business income
Here’s a simple table outlining key deduction differences:
Expense Type | PSI Rules Apply (Not a PSB) | Operating as a PSB |
|---|---|---|
Home Office Occupancy (Rent, Mortgage Interest, Rates) | Generally Not Deductible | Potentially Deductible (Subject to general rules) |
Payments to Associates (for non-principal work) | Limited Deductibility | Deductible (Subject to general rules) |
Superannuation for Individual Performing Services | Obligation to Contribute (similar to employee) | Business makes superannuation contributions (normal rules) |
Business Travel Expenses | Generally Deductible (if directly related to earning PSI) | Generally Deductible (Subject to general rules) |
General Business Overheads (Insurance, Registrations) | Generally Deductible (if related to earning PSI) | Generally Deductible (Subject to general rules) |
Operating as a personal services business (PSB)
Things can look a lot better if your business counts as a Personal Services Business (PSB). So, what is a PSB?
Basically, your business might be a PSB if:
- You pass the ‘results test’ for most of your income (this means you’re paid for achieving a specific outcome, not just for your time).
- OR, if you don’t meet the results test, but most of your income (more than 20%) comes from more than one client, AND you pass one of these other tests:
- The unrelated clients test (you provide services to two or more clients who aren’t connected to each other).
- The employment test (you employ others, or subcontract more than 20% of the principal work by value to non-associates).
- The business premises test (you mainly operate from your own business location, separate from your home and your clients’ premises, and it’s used exclusively for your business).
Good news: More tax deductions!
If your business is a PSB, the strict PSI rules about what you can claim as deductions usually don’t apply. Yay! This means you can generally claim a wider range of business expenses, just like other small businesses. This could include things like:
- Some home office running costs (if you meet the specific rules).
- Wages paid to associates (like your spouse) for work they do for the business.
- Super contributions your business makes for yourself or your employees.
More control over your business profit
Another plus of being a PSB is that the income isn’t automatically treated as your personal income. Your company or trust can potentially keep some of the profit to grow the business or for investments. Of course, normal tax rules for companies and trusts still apply (like company tax rates or how trusts distribute income), but it gives you more flexibility with your business finances.
Didn’t pass the usual PSB tests? There’s still hope!
What if you don’t quite meet the standard PSB tests, but you truly believe you’re running an independent business (not just looking like an employee)? For instance, maybe one big project meant most of your income came from one client for a year, but usually, you have lots of different clients and operate commercially.
In special cases like this, you can ask the ATO for a ‘PSB determination’.
Getting the ATO’s okay for PSB status
If the ATO gives you a PSB determination, it officially confirms your PSB status for a set time. This means you can operate under the more flexible PSB rules during that period. To get this thumbs-up, you’ll need to show the ATO that:
- Your business genuinely operates on its own.
- You take on normal business risks (like quoting for jobs, being responsible for fixing mistakes, and having liability insurance).
- Your business looks and acts like a standalone business, even if you didn’t tick all the usual boxes for the PSB tests that year.
Personal services income vs sole trader
It’s easy to get a bit muddled between being a ‘sole trader’ and earning ‘personal services income’ (PSI). They’re related, but different things. Here’s the simple breakdown for you in a table:
Feature | Sole Trader | Personal Services Income (PSI) |
|---|---|---|
What it is mainly about | How your business is set up (it’s just you running the show!) | The type of money you earn (mostly from your personal skills or efforts). |
Who/What is it? | It’s you, as an individual, being the business in Australia. | It’s income that’s mainly a direct result of your specific talents or hard yakka (hard work). |
Example | A freelance writer, a solo tradie, or a consultant working under their own name. | The fees a graphic designer charges for their design work, or a consultant for their expert advice. |
How it connects to the other | You, as a sole trader, can definitely earn PSI. | If you earn this as a sole trader, special ATO rules might kick in for this income. |
Important tax note | Being a sole trader doesn’t automatically mean you can skip the PSI rules. | These rules can change what tax deductions you can claim against this specific income. |
Sleek provides accounting services for Sole Traders as well. Click on the link for more details!
Common misconceptions about personal service income
PSI rules can be a bit of a head-scratcher, and lots of sole traders and contractors in Australia get tripped up by common myths. Let’s clear a few of these up!
Myth 1: “My ABN and GST registration mean PSI rules don’t apply to me.”
Not quite! While you definitely need an ABN and to be registered for GST to run your business in Australia, these don’t automatically mean you can ignore the PSI rules. What really matters to personal services income in ATO is how you earn your income and your specific work setups.
Myth 2: “If I use a company or trust, I can avoid PSI rules.”
That’s another common mistake. The ATO is pretty savvy – they’ll look beyond your business structure (whether you’re a company, trust, or partnership). What they really focus on is where the income actually came from and if it was earned mainly through your personal skills or efforts.
Myth 3: “I pay PAYG instalments, so PSI rules can’t affect me.”
Paying your tax in instalments (PAYG) is just a way to manage your income tax throughout the year. It’s super helpful for budgeting, but it doesn’t change whether your income is classed as PSI or if those tricky PSI rules apply to you. That all comes down to the specific tests.
Let’s look at personal services income examples:
Imagine Susan is a consultant working through her company, Susan Consulting Pty Ltd. She gives strategic advice to businesses.
- One year, 85% of her company’s income comes from just one main client.
- Because so much income is from one client (she didn’t pass the ‘80% rule’), the PSI rules apply to her company.
This is true even though she has a company and an ABN. It means her company can only claim certain deductions, and the profit has to be reported as Susan’s personal income on her tax return. It really shows how the way you earn the money is more important than the business structure.
What about income that ISN’T PSI?
Now, what if Susan also creates and sells online training courses related to her consulting work?
- The money she makes from selling these courses could be different.
- This income might not be PSI because it comes more from selling a product (the course materials she developed) rather than purely from her direct personal effort for each sale.
This shows how you can have different types of income, and some might be PSI while others aren’t.
Practical tips for managing PSI
Dealing effectively with PSI requires diligence and good recordkeeping. Maintaining thorough records is absolutely essential for demonstrating compliance with Australian taxation requirements.
1. Keep good records
Dealing with PSI means being organised and keeping good records. It’s super important for showing the ATO you’re doing things right.
Make sure you keep:
- Copies of all your client contracts.
- Detailed invoices that clearly show the work you did.
- Any proof you have if you believe you’re running a Personal Services Business (PSB). This could include things like your advertising materials (to show you work for different clients), timesheets (if you have employees helping you), or lease agreements for your business space.
2. Check your contracts
Always read your contracts carefully before you sign them. Look specifically for clauses that say whether you’re being paid for delivering a specific result or outcome, or if you’re paid based on the hours you work. Understanding these terms is vital for figuring out if PSI rules apply to you and helps you manage any potential issues.
3. Set up your work smartly
Think about how you structure your work and your agreements with clients. If it’s possible for your situation, aim to:
- Have contracts that focus on the outcome or result you’ll deliver.
- Clearly define what you’ll provide.
- Make it clear that you’re responsible for fixing any defects in your work.
Working with a diverse range of clients can also be really helpful. It strengthens your position as an independent business and can help you avoid problems with the ‘80% rule’ (this is where most of your income comes from a single client).
4. Use tools to help
Good accounting software can be a lifesaver for tracking your income streams and expenses. Some software can even link with tools like Google Drive to keep your documents stored safely. Using the right software helps you:
- Monitor where your client income is coming from, which is important for the 80% rule.
- Keep all your necessary records organised and easy to find when it’s tax time, or if the ATO needs to see them.
5. When in doubt, ask an expert
Seeking professional advice from a qualified tax agent or accountant is a wise decision if you’re still unclear about your PSI status, whether the PSI rules apply to you, or how to correctly report PSI on your tax return. It’s far better to clarify your position early and make sure you’re compliant than to face potentially costly adjustments, interest, and penalties from the Australian Taxation Office later on. They can help you understand all the tricky bits.
Conclusion
Working for yourself brings many rewards and autonomy, but navigating the tax system is a key responsibility for any sole trader or small business owner. Understanding personal service income is vital for anyone whose income is primarily generated from their personal skills or labour. The PSI rules significantly impact which tax deductions you can claim and how your services income is ultimately taxed.
Always remember to assess your situation against the results test first, as passing this test generally means the restrictive rules don’t apply. If you don’t meet that primary test, carefully consider the 80% rule regarding client concentration, and then the unrelated clients, employment, or business premises tests to determine if you qualify as a Personal Services Business (PSB).
FAQs about PSI
What is a personal service income?
Personal service income (PSI) is income primarily earned from your personal skills, knowledge, and effort, rather than from selling goods or using substantial assets. For example, a graphic designer who creates logos for clients earns income from their design skills.
Is it better to be classified as PSI or PSB?
Being classified under PSI or running a Personal Services Business (PSB) isn’t about one being “better.” It depends on your circumstances and what offers the most advantageous tax outcomes. Each has different rules for deductions, tax obligations, and administrative requirements.
What does PSI mean in ATO?
For the ATO, PSI means “Personal Services Income,” defining income primarily from your skills, knowledge, and efforts, not from selling goods or using substantial assets. The ATO has specific PSI rules to ensure appropriate tax payment for those earning this way.
What is the 80 rule for personal services income?
The “80% rule” is key to the ATO’s PSI guidelines. If 80% or more of your income comes from a single client (and related entities) within a tax year, the ATO may scrutinize your income, even if structured through a company or trust.
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