Turning Skills into Real Gold: Understanding Personal Services Income (PSI)
If you’re a sole trader or run a business built around your personal skills—like IT, design, or consulting—Personal Services Income (PSI) could affect how your income is taxed. And if you don’t understand the rules, you could miss out on valid deductions or get hit with an unexpected tax bill.
Here’s what you need to know to stay compliant and strike gold with smart planning.
What Is Personal Services Income (PSI)?
According to the Australian Taxation Office (ATO), PSI is income that’s mainly a reward for your personal effort or skills—not from selling goods or the use of assets. If more than 50% of the income you earn from a contract is for your personal work or know-how, it’s likely PSI.
Source: ATO – What is PSI?
PSI doesn’t apply to employees. But if you operate as a sole trader, company, partnership or trust, the rules could apply—making your business a Personal Services Entity (PSE).
Why Does PSI Matter?
If PSI rules apply to your income:
- You may have to attribute the income to yourself personally, even if earned through a company or trust.
- Some common business deductions may be disallowed, such as rent or mortgage interest on a home workspace.
- You may not be able to split the income with family members or other entities.
It’s important to note that PSI rules do not change your legal status as a contractor or business operator—but they do affect how your income is taxed.
Source: ATO – PSI and your tax obligations
How Can You Avoid PSI Rules?
If you can show that your business qualifies as a Personal Services Business (PSB), the PSI rules won’t apply. To do this, you need to pass at least one of four tests set by the ATO:
1. The Results Test
You’re paid to achieve a specific result, not just for your time. You use your own tools and fix mistakes at your own cost.
2. Unrelated Clients Test
You earn income from two or more unrelated clients and actively market your services to the public.
3. Employment Test
You employ or contract others (not just family or associates) who complete at least 20% of the main work.
4. Business Premises Test
You operate from dedicated business premises that are physically separate from your home and client locations.
But there’s a twist: If 80% or more of your PSI in a financial year comes from one client (and their associates), you must pass the Results Test or apply to the ATO for a PSB determination to avoid PSI rules.
Source: ATO – PSB and the 80% rule
What Deductions Are Limited Under PSI?
If PSI rules apply, the ATO limits the deductions you can claim. For example:
- You generally cannot claim rent, mortgage interest, or rates if working from a home office.
- Payments to associates for admin or support services are also disallowed in most cases.
However, expenses directly related to your income-producing activities—like tools, training, or professional insurance—may still be deductible.
Source: ATO – Claiming deductions when PSI rules apply
ATO Tools to Help You Decide
Not sure if your income is PSI? The ATO has an online PSI Decision Tool to help you work it out.
Try it here →
We also recommend keeping clear records of your contracts, clients, marketing efforts, and work structure. These can help support your position if the ATO reviews your status.
Strike Gold with Confidence—Get Expert Help
Working hard should be rewarding. Don’t let PSI rules catch you off guard.
At DJ Grigg Financial, we help small businesses and contractors:
- Assess if their income is PSI
- Navigate the four PSB tests
- Structure their operations for tax effectiveness
- Maximise legitimate deductions
Let’s make sure your hard-earned income stays in your pocket, not lost in tax confusion.
Contact us today for a personalised PSI assessment. We’ll ensure you are claiming the maximum allowable deductions and being taxed correctly.