Are You Caught by PSI Rules? What Australian Business Owners Need to Know
- Leonie Martin
- Jul 27
- 9 min read
If your business earns income primarily because of your personal skills, knowledge, or effort and you operate through a company or trust the ATO may have something to say about how that income is taxed.
Personal Services Income rules, commonly known as PSI rules, are one of the most misunderstood areas of Australian tax law. They apply across a wide range of industries and structures, and getting them wrong can mean losing deductions you thought you were entitled to, or having income taxed differently than you expected.
This is what you need to know.
What is Personal Services Income (PSI)?
Personal Services Income (PSI) is income that is earned mainly as a reward for your personal efforts or skills rather than from the use of assets, from a business structure, or from the sale of goods.
If more than 50% of the income you receive under a contract is for your personal skills or efforts, that income is classified as PSI.
PSI can arise across almost any industry:
IT contractors and consultants
Engineers and technical specialists
Management consultants
Financial advisers and planners
Lawyers and legal professionals
Architects and designers
Healthcare professionals in private practice
Tradespeople working predominantly on labour
The key question is not what industry you're in. It's whether the income you're earning is tied to what you personally do, rather than what your business produces or owns.
Why do PSI rules exist?
Before PSI rules were introduced, it was common for individuals to channel personal income through a company or trust to access lower tax rates or split income with family members.
The ATO introduced PSI rules to prevent this. If your income is classified as PSI, the rules limit what you can do with it regardless of whether it flows through a company, trust, or partnership.
In plain terms: the ATO wants income that is really yours, earned through your personal effort, to be taxed as if you earned it directly, not through a structure that reduces that tax.
Does the PSI classification apply to you?
Not all personal services income is automatically subject to PSI rules. There are two ways to be excluded from those rules:
1. The results test
You pass the results test if:
You are paid to produce a specific result or outcome (not just for your time)
You provide your own tools and equipment to do the work
You are responsible for fixing defects in your work at your own cost
If you meet all three criteria for at least 75% of your PSI income in a financial year, the PSI rules do not apply to you. This is the most straightforward way out.
2. The 80% rule
If you do not pass the results test, the next question is whether 80% or more of your PSI comes from a single client. If it does, you are considered a personal services business only if you pass at least one of the following tests:
The unrelated clients test — you provide services to two or more unrelated clients
The employment test — you employ someone who performs at least 20% of the principal work
The business premises test — you maintain business premises that are physically separate from your home and from your clients' premises
If you earn 80% or more of your PSI from a single client and don't pass any of these tests, the PSI rules apply to you in full.
If you're not sure whether you pass these tests, the ATO's personal services business determination process allows you to apply for a ruling on your specific situation.
What happens if PSI rules apply to you?
If your income is classified as PSI and the rules apply, the consequences are significant:
Deduction restrictions
You lose access to certain deductions that a normal business can claim. Specifically you cannot deduct:
Payments to associates (including family members) for work that is not directly related to earning the PSI
Rent, mortgage interest, rates, or land tax for premises used as a home office
Payments to your spouse or other associates for non-income-producing activities such as bookkeeping, administration, or reception work
Income attribution
If PSI flows through a company or trust, it is attributed back to you as an individual. This means:
The income is taxed at your personal marginal rate — not at the lower corporate rate
You cannot split the income with other beneficiaries of a trust
The structure does not provide the tax advantage you may have expected
Super guarantee obligations
If your income is PSI, the entity receiving it may still have super guarantee obligations — even if you are technically a contractor rather than an employee. This is a common area of confusion and risk.
Common mistakes business owners make with PSI
Assuming a company structure solves the problem
Operating through a company does not automatically protect you from PSI rules. If the income is PSI, it is attributed back to you regardless of the structure. The structure matters but it needs to be the right one for the right reasons.
Claiming deductions that aren't available
Many business owners operating under PSI rules continue to claim deductions they are not entitled to, particularly payments to family members or home office expenses. These can be reversed on audit.
Not knowing whether the results test applies
The results test is the cleanest exit from PSI rules, but many business owners have never assessed whether they meet it. If you are paid for outcomes rather than time, provide your own tools, and bear the risk of defects, you may pass and your accountant should be checking this annually.
Ignoring PSI when restructuring
PSI rules are one of the most important factors in any structure review. A company or trust that makes sense in other respects may not deliver the expected tax benefits if the primary income is PSI. This is why structure reviews need to look at PSI before recommending any changes.
What to do if PSI rules apply to you
If your income is classified as PSI and the rules apply, it does not mean your structure is wrong but it does mean it needs to be properly understood and managed.
The practical steps are:
1. Assess which test you meet — or don't meet Work through the results test first. If you pass it for 75% or more of your income, you are excluded from the rules. If you don't, assess the 80% rule and the related tests.
2. Review your deductions Make sure you are not claiming deductions that are restricted under PSI rules. An incorrect deduction is not just a missed opportunity — it is a risk if the ATO reviews your return.
3. Review your structure in the context of PSI If PSI rules mean that income is being attributed back to you at your marginal rate anyway, the costs and complexity of your current structure need to be weighed against the actual benefit. In some cases a simpler structure may be more appropriate. In others, the structure still makes sense for asset protection or other reasons even if the tax benefit is limited.
4. Consider a personal services business determination If your situation is borderline or complex, the ATO will issue a determination on whether PSI rules apply to you. This gives certainty and can be important for planning purposes.
5. Get advice before the financial year, not at the end of it PSI rules are a planning issue, not just a compliance issue. The time to address them is at the start of the financial year, before income is earned, not after.
PSI and the $1M threshold
PSI rules are particularly relevant for business owners approaching or past $1 million in revenue, for two reasons.
First, at that level the tax impact of getting PSI wrong is significant. Income attributed back at a marginal rate of 47% versus income retained in a company at 25% is a meaningful difference and it compounds every year the situation is not addressed.
Second, businesses at $1M+ often have structures that were set up without PSI being properly considered. The structure may have been established for asset protection or income splitting reasons without anyone having assessed whether the primary income is PSI and therefore whether those strategies are actually available.
A structure that looks right on paper may be producing different tax outcomes than expected if PSI has never been assessed.
Working out where you stand
PSI rules are not always straightforward. The tests interact, the facts of each contract matter, and the ATO's guidance is detailed and specific.
If you have never had your income assessed against PSI rules — or if your circumstances have changed and you are not sure whether your current assessment still holds — it is worth finding out.
A few questions worth asking:
Have you ever had your income formally assessed against the PSI tests?
Does your accountant review your PSI position each financial year?
Are you claiming deductions that may be restricted if your income is PSI?
Has anyone looked at whether your current structure is delivering the tax outcome you expect, given your PSI position?
If most of those questions produce an uncertain answer, the starting point is a proper review.
Frequently asked questions about PSI rules in Australia
What is Personal Services Income in Australia?
Personal Services Income (PSI) is income earned mainly as a reward for an individual's personal skills or efforts, rather than from assets, a business structure, or the sale of goods. If more than 50% of the income received under a contract is for personal skills or efforts, that income is classified as PSI under Australian tax law.
Who does PSI apply to in Australia?
PSI rules can apply to any Australian business owner or contractor who earns income primarily through their personal skills — including IT contractors, consultants, engineers, lawyers, architects, financial advisers, healthcare professionals, and tradespeople. The rules apply regardless of whether income flows through a sole trader arrangement, company, trust, or partnership.
What is the results test for PSI?
The results test is the primary way to be excluded from PSI rules. You pass the results test if you are paid to produce a specific result or outcome (not just for your time), you provide your own tools and equipment, and you are liable to fix defects in your work at your own cost. If you meet all three criteria for at least 75% of your PSI income in a financial year, the PSI rules do not apply to you.
What happens if PSI rules apply to my company or trust?
If your income is classified as PSI and you operate through a company or trust, the income is attributed back to you as an individual and taxed at your personal marginal rate — not at the lower corporate rate. You also lose access to certain deductions, including payments to associates for non-income-producing work and home office expenses. The tax advantage you may have expected from your structure may not be available.
Can I still use a company or trust if I have PSI?
Yes, having PSI does not mean your company or trust structure is wrong. The structure may still be appropriate for asset protection or other reasons. However, it does mean the structure needs to be properly understood and managed, and that the tax outcomes need to be reassessed in light of the PSI classification.
What is the 80% rule for PSI in Australia?
If you do not pass the results test, the next question is whether 80% or more of your PSI comes from a single client. If it does, you are only excluded from PSI rules if you pass at least one of three additional tests: the unrelated clients test (you provide services to two or more unrelated clients), the employment test (you employ someone who performs at least 20% of the principal work), or the business premises test (you maintain business premises separate from your home and your clients' premises).
How do I know if my income is PSI?
The starting point is to assess whether more than 50% of your income under a contract is for your personal skills or efforts, rather than for the use of assets or the delivery of a product. If you are unsure, the ATO provides a personal services business determination process that gives a formal ruling on your specific situation. Your accountant should be assessing your PSI position annually.
Does PSI affect my superannuation obligations?
Yes. If your income is PSI, the entity receiving it may still have superannuation guarantee obligations even if you are technically a contractor. This is a common area of confusion. The super guarantee can apply to individuals who are contractors paid mainly for their labour, regardless of the structure through which they operate.
The $1M Profit Tax Reset™
PSI is one of the first things assessed in Stage 1 of the $1M Profit Tax Reset — the Expose Leaks stage.
Before anything can be optimised, the current structure and income classification need to be understood properly. That means working out whether PSI applies, whether the right tests are being met, and whether the structure is delivering the tax outcome the business owner expects.
The Reset is a 90-day hands-on engagement for Australian businesses past $1M. We do the work. You make the decisions.
The $1M Profit Tax Reset™ is limited to 5 businesses per quarter.
If your business is past $1M and you're done guessing your tax position, this is where it changes. Book a 15-minute discovery call with Leonie to find out if you qualify.
HelloLedger is an online Australian accounting firm specialising in proactive tax planning, advisory, and SMSF services for Australian businesses with $1M+ revenue.
Leonie Martin CPA | HelloLedger Pty Ltd is a registered tax agent.
