Are you considering becoming an independent contractor, consultant, or freelancer? If you’re starting a new career path, it’s important to understand the personal services income (PSI) rules that may apply to you.

What Is Personal Services Income (PSI)?

Personal services income (PSI) refers to income that is primarily generated from your personal skills, knowledge, expertise, or efforts as an individual. If more than 50% of what you receive from a contract is payment for your skills, labour, or expertise, it’s classified as PSI.

PSI applies to all industries where your personal effort or skills are the main driver of income, such as construction, IT consulting, medical services, and design work. Income generated from selling goods, using income-producing assets, or certain business structures isn’t considered PSI.

Examples: Is Your Income PSI?

Income that is PSI:

Jodie is an IT consultant who provides systems analysis services through her company. She enters a contract to provide consultancy services to another company. Since more than 50% of her payment is for her personal skills and efforts, this income is classified as PSI.

Income that is not PSI:

Henry is a carpenter who operates a partnership with his spouse Kim. They design and construct bespoke furniture, which they sell online and at trade fairs. Since the partnership earns income from furniture sales (not from Henry’s personal skills or efforts), this income is not considered PSI.

How the PSI Rules Affect Your Taxes

Individuals can earn PSI directly as a sole trader, or through an entity like a company, partnership, or trust. When you earn PSI indirectly through another entity, it is referred to as a personal services entity (PSE). The tax treatment of your income depends on whether you’re operating as an individual/PSE or running a personal services business (PSB).

If you’re an individual/PSE and the PSI rules apply, your income is taxed as personal income at individual rates, and some deductions may not be allowed.

If you qualify as a PSB, the PSI rules don’t apply, and your income is treated as regular business income, subject to standard business tax rules.

How to Self-Assess as a PSB

To be classified as a PSB, you need to meet one of the following criteria:

Results Test:

You meet the results test if at least 75% of your income is paid to achieve a specific result, you’re responsible for fixing any defects, and you supply your own equipment to perform the work.

80% Rule:

If 80% or more of your PSI comes from one client and their associates, the PSI rules apply. If less than 80% of your income comes from one client, and you meet one of the three PSB tests below, you can self-assess as a PSB.

Three PSB Tests:

Unrelated Clients Test: You work for at least two unrelated clients who found you through public advertising or similar business promotion.

Employment Test: You hire others to perform at least 20% of your principal work that generates your PSI.

Business Premises Test: You maintain dedicated business premises, separate from your home, throughout the income year.

If you’re unable to self-assess as a PSB and don’t have a PSB Determination (available from the Commissioner of Taxation in some circumstances), then the PSI rules apply.

Still Unsure?

If you’ve reviewed the PSI rules and gone through the necessary tests and assessments but are still unsure whether the PSI rules apply to you, it’s best to seek advice from a registered tax professional. The ATO can also provide tailored technical advice in certain situations.