Personal services income PSI is income that’s mainly a reward for your personal efforts or skills. If more than half the income you receive for a contract was for your labour or expertise, all income from that contract is PSI.
Who earns personal services income?
PSI can be earned in almost any industry or profession. The most affected parties are usually independent contractors, freelancers, and sole traders in service-oriented roles.
Top affected professions include information technology consultants, engineers, medical practitioners, accountants, lawyers, and construction workers. You can earn PSI as a sole trader or through another entity (e.g. a company, partnership or trust – known as a personal services entity).
When does personal services income apply?
Personal services income can come saddled with special tax rules that influence your tax obligations and deductions. The PSI rules apply when more than 50% of the income you earn for a contract was from your personal skills or efforts. If so, the value of the entire job is personal services income.
On the other hand, if less than 50% of the invoice value relates to your personal efforts, the whole job is not PSI. You also don’t earn PSI when you supply finished goods, rent out an income-producing asset like equipment or vehicles, or license intellectual property like a software licence. In those cases, the income generated comes from the asset, not your labour.
Why do the PSI rules exist?
The personal services income rules prevent individuals from diverting their income through a company, partnership or trust to get a lower tax rate. They are put in place to make sure there’s a level playing field.
When the PSI rules apply, special rules mean the income is attributed to you and not another individual or entity. You can’t split income with family members to lower your taxable income or gain a tax benefit.
What happens if the PSI rules apply?
If the PSI rules apply, you’ll be treated as a ‘de facto employee’ for tax purposes. The PSI income is attributed to you as taxable income and taxed at your individual tax rates, regardless of the business structure you use.
Bear in mind that certain tax deductions become unavailable as well. You can’t claim home office rent, mortgage interest, or payments to associates for work that isn’t ‘principal work’.
What deductions can you claim under the PSI rules?
You can still claim deductions that relate to generating PSI. These include licensing or registration fees, bank fees, other account-keeping fees, and certain insurance premiums.
You can also claim an employee’s salary or wages if they’re engaged at arm’s length, plus the cost of your own equipment used to provide services. Some home office expenses are claimable, although occupancy costs aren’t.
Because every job can be PSI or not, keeping records of each contract is a must come tax time.
What is a personal services business?
A personal services business (PSB) is exempt from the PSI rules. If you self-assess as a PSB, or hold a personal services business determination, the PSI rules won’t apply to the PSI you receive in that income year.
You qualify as a PSB if less than 80% of your PSI comes from one client and you meet one of the specified criteria. Where you receive PSI through the same entity across multiple contracts, each contract is still assessed on its own. The first test is the results test.
PSB: The results test
This is a self-assessment test. You’ll pass if you meet it for at least 75% of your PSI. It relies on you being paid to produce a specific result, supplying your own equipment, and being liable for rectifying defects.
The other PSB tests
If you fail the results test, you can take a look at three other PSB tests, so long as 80% or more of your PSI doesn’t come from one source:
- Unrelated clients test: You provide services to two or more unrelated clients as a result of offers made to the public.
- Employment test: You engage others to perform at least 20% by market value of the principal work.
- Business premises test: You use business premises that are physically separate from your home and your clients’ premises.
What is a personal services business determination?
If you’re unable to self-assess as a PSB, you can apply to the Australian Taxation Office (ATO) for a personal services business determination (PSBD). A PSB determination is issued by the Commissioner of Taxation.
The Commissioner will grant a PSBD if they are satisfied you’ve met the PSB tests, or that unusual circumstances will stop you from meeting them. Where a personal services entity has more than one individual generating PSI, each test individual’s PSI is assessed separately. If you can’t self-assess and don’t have a PSBD for the income year, the PSI rules will apply to all PSI received.
How do you report PSI on your tax return?
You have to declare PSI amounts at the relevant labels on your income tax return — whether or not the PSI rules apply. Individuals must declare income to the ATO in every case.
When the PSI rules apply, you complete a few extra questions on your tax return. If PSI is received through a company, partnership, or trust, you’ll also have to complete reconciliation labels in that entity’s tax return.
Keep good records explaining all transactions relating to your tax affairs. You’ll generally need to keep records in English for five years. For more information, check the ATO’s PSI page and our guide on sole trader tax.
When personal services income applies
Personal services income rules apply when an invoice for a job completed includes fees of more than 50% of the value of the invoice for your personal efforts, skills, and labour.
If so, the value of the entire job is personal services income.
When personal services income doesn’t apply
Conversely, personal services income rules do not apply when an invoice for a job you complete includes fees of less than 50% of the value of the invoice for your personal efforts, skills, and labour.
If so, the value of the entire job is not considered to be personal services income.
You also don’t earn personal services income when:
- You supply finished goods, even if you made them.
- From renting out equipment or vehicles.
- From licensing out intellectual property.
Personal services income tax deductions
Each job you undertake can either be PSI or not. PSI doesn’t necessarily apply to all your income. As such, keeping records of each job is important come tax time.
You can claim specific tax deductions when you earn personal services income under PSI rules, such as:
- Licencing or registration fees.
- bank fees and other account-keeping fees.
- Certain insurance fees.
- An employee’s salary or wages if they’re engaged at an arm’s length.
- Some of your home office expenses.
See related terms
What is a sole proprietorship?
What are fixed assets?
How to calculate gross profit margin?
