You’ve set up a company. Your invoices go out under a business name. You’ve got a logo, a website, maybe even accounting software and a separate bank account. But one client still makes up most of your work, and most of what they pay for is your time, judgement, and expertise.
What You'll Learn
Are You a Contractor Unsure About Your Tax
What Is Personal Services Income Really
Applying the Four Critical PSI Self-Assessment Tests
PSI Rules Applied Your Deduction and Tax Outcomes
Managing Your PAYG GST and BAS Obligations with PSI
That’s where many contractors, consultants, and small operators start to feel uneasy. You look like a business commercially, but for tax purposes the ATO may still treat that income as personal services income.
This catches more people than it should. IT consultants, engineers, project managers, designers, medical professionals, and specialist advisers often assume that using a company or trust changes the tax outcome. Sometimes it doesn’t. If the income is mainly a reward for your own efforts, the structure on top may not do what you think it does.
The practical issue isn’t just classification. It’s what follows. Can the income stay in the entity? Can you split it? Which deductions survive? What happens if you also hold rental properties, lodge BAS, or live overseas while billing Australian clients? Those are the decisions that create either a clean file or a painful amendment later.
Are You a Contractor Unsure About Your Tax
A common version of this problem looks like this. An engineer leaves employment, sets up a Pty Ltd, signs a contract with a former industry contact, and starts billing monthly. The work is real. The business is real. But the income still comes from that person’s own brain, experience, and output.
The same uncertainty turns up with software developers, marketing specialists, and medical contractors. They ask a fair question. “Am I running a business, or am I just earning income that the ATO will push back onto me personally?”
That question is exactly why the PSI rules exist. They are integrity rules. Their job is to stop someone from taking income that is earned from personal effort and parking it in a company, trust, or partnership just to get a better tax outcome.
This doesn’t mean every contractor has a problem. It means labels don’t decide the issue. Calling yourself a consultant, creating a company, or issuing invoices with GST doesn’t settle whether the income is PSI.
A quick sense-check helps. If a client is mainly paying for you rather than for substantial plant, goods, software, systems, or a team-delivered service, PSI should be on your radar.
PSI is less about what your ABN says and more about what the client is buying.
If you’re still not sure whether your working arrangement looks like contracting or employment, this guide on employee or independent contractor ATO rules is a useful companion. The two issues are separate: the PSI rules don’t turn a contractor into an employee, and passing or failing them doesn’t decide whether you’re an employee for super or workplace law purposes. But the two questions often turn up in the same fact pattern.
The hard part isn’t learning the acronym. The hard part is knowing what to do when your facts sit in the grey zone. That’s where careful contract review, invoice wording, and recordkeeping matter.
What Is Personal Services Income Really
A contractor sets up a company, invoices through the company bank account, registers for GST, and assumes the income belongs to the company. Then tax time arrives and the harder question surfaces. What was the client paying for?
Personal services income is income that mainly comes from an individual’s own labour, skill, expertise, or effort. The practical threshold is simple. If more than half of what the client pays under a contract is really for your work rather than for goods, equipment, intellectual property, systems, or a broader business operation, the contract income is usually PSI under ATO guidance.
A practical way to judge the 50% rule
A cake business provides a simple illustration.
If the sale price mostly reflects ingredients, production capacity, delivery, packaging, and a repeatable business process, the baker’s personal effort is only part of the value. If the customer is paying for one baker’s design skill and hands-on craftsmanship for a custom wedding cake, the personal effort component is doing most of the work in the price.
The ATO applies the same logic to contractors and consultants. It asks what the client bought in substance, not what the invoice says.
A few common fact patterns make this easier to test:
Trainer or consultant: A client pays for your knowledge, presentation, and delivery, with only minor handouts or materials included. That will often be PSI.
IT contractor with significant software resale or licensing: If a large part of the contract price relates to software provided to the client, and your labour is the smaller component, the income may fall outside PSI.
Medical or professional specialist working through a company: If patients, clinics, or counterparties are really paying for your personal judgement and qualifications, PSI risk is usually high even if the billing entity is a company.
Investor or overseas Australian with an Australian service entity: If the entity also holds investments or foreign income, that does not change the character of service fees earned from your own work. PSI can still apply to that service income and catch people who assume a mixed-income structure gives them protection.
That last point matters. People often focus on the entity and miss the income stream. PSI is tested contract by contract, based on what generated the payment.
Why this distinction matters
The PSI rules exist to stop income earned from personal effort being diverted through a company, trust, or partnership just to get a better tax result. That is why many contractors get caught even though their structure is otherwise valid.
The trade-off is straightforward. A company or trust can still be useful for asset protection, admitting business partners, or building a broader enterprise. But if the income is mainly a reward for your own work, the tax law may still pull that amount back to you personally for PSI purposes.
Practical rule: If the client would have paid the same price to your business regardless of which suitably qualified team member delivered the work, the income looks more like ordinary business income. If the client engaged the business because they wanted you, your reputation, or your judgement, PSI risk rises.
At this point, mistakes become expensive. Contractors often assume PSI is only a definition issue. In practice, it drives later outcomes on deductions, PAYG treatment, and how much confidence you can have in your structure if the ATO reviews it. For overseas Australians, it can also create false comfort. Foreign residency, a foreign company, or offshore cash flow does not automatically change the PSI character of Australian-sourced service income.
If you have worked with UK contractor rules, the closest policy comparison is IR35. The rules are different, but the underlying concern is similar. Income that looks like it came from one person’s work should not gain a tax advantage just because it sits inside an entity.
Applying the Four Critical PSI Self-Assessment Tests
A contractor can look fully independent on paper and still fail PSI. This is common with professionals who trade through a company, invoice professionally, carry insurance, and assume that settles it. It does not. The critical question is whether your facts support treatment as a personal services business.
If more than half of what the client pays you is really for your labour, skill, or expertise, the PSI rules in Part 2-42 of the Income Tax Assessment Act 1997 are in play. The self-assessment tests are the filter. Pass the right test (or hold a personal services business determination from the ATO) and the restrictive PSI rules don’t apply. Fail them and a structure that looked tax-effective can start working against you.
For investors and Australians working across borders, this is a common trap. A foreign company, overseas bank account, or side income from investments does not change the character of Australian-sourced income that mainly comes from your own services.
Start with the results test
This is usually the strongest route because it focuses on how the work is priced and delivered, not just how your business is labelled.
You need to meet all three conditions for at least 75% of your PSI for the income year. If you do, you’re a personal services business and you don’t need to look at the 80% rule or the other tests:
You are paid to produce a result.
You are required to supply the plant and equipment or tools of trade needed to do the work.
You are, or would be, liable for the cost of rectifying any defects in the work.
On paper, plenty of contracts seem close. In practice, the weak point is usually the first or third limb. If you bill by the hour, work under daily supervision, and turn up to supply effort, the arrangement starts to resemble labour hire. If you deliver a defined outcome for an agreed fee and carry rework risk, your position is stronger.
Pass style example
A software developer agrees to build and deploy a payment integration for a fixed price. The contract specifies deliverables, milestone acceptance, and defect remediation at the developer’s cost. The developer uses their own hardware and development tools. That fact pattern is far more consistent with a contracted result.
Fail style example
A project manager works five days a week for one client, bills a daily rate, uses the client’s systems, attends internal stand-ups, and has no genuine liability if the project slips or the work needs correction. That usually points back to labour being supplied, not a result being sold.
A practical test helps here. Ask: if the work takes you twice as long as expected, who wears that cost? If the answer is "the client, because I keep billing", the results test is already under pressure.
Then check the 80% rule and the unrelated clients test
Client concentration causes a lot of PSI problems because contractors often count invoices instead of relationships.
If 80% or more of your PSI comes from one client (and that client’s associates), you can’t self-assess as a personal services business under the unrelated clients, employment or business premises tests. You then need to pass the results test, or apply to the ATO for a personal services business determination. If you get all your work through one agency, that counts as a single source for the 80% rule, even if you work for several of the agency’s clients.
The unrelated clients test itself requires PSI from two or more clients who aren’t associated with each other or with you, where the work came directly from making offers or invitations to the public, such as advertising, tendering or a public website. Clients you reach through a labour hire firm don’t count.
The mistake is simple. Three purchase orders, monthly invoices, and two departments inside the same corporate group still usually mean one client source for PSI purposes.
Pass style example
A cybersecurity consultant wins work from several unrelated businesses through tenders, a public website, and direct marketing. No single client dominates the year. That pattern is much easier to defend.
Fail style example
An engineer spends almost the whole year with one mining client, then picks up a short weekend job for a family friend’s company. The side job rarely changes the outcome if one client still accounts for the clear bulk of the PSI.
Use this short review before year-end, not after:
Measure client concentration annually. Monthly variation can hide a one-client year.
Group related entities together. Sister companies and associated entities do not create diversity.
Check how work was obtained. Open market advertising and tendering help more than private introductions through one labour network.
The employment test
You pass the employment test if you engage others to perform at least 20% (by market value) of your principal work, or you have one or more apprentices for at least half the income year. Associates count here only if they perform principal work.
Support staff alone usually do not get you there. A spouse handling admin, a bookkeeper reconciling accounts, or a virtual assistant answering emails may help the business run better, but that does not usually show that principal work is being produced by others.
A stronger case is a firm where employees or genuine subcontractors perform a meaningful part of the fee-earning work. The distinction matters. If clients are buying a service capability from a small team, PSI risk can reduce. If they are still buying your judgement, your hands-on work, and your personal delivery, the structure is only a wrapper.
This is one of the areas where contractors can learn from broader worker-classification disputes. The legal tests are different, but the commercial warning signs overlap.
The business premises test
Many solo operators assume a home office will help here. Usually, it will not.
You need to maintain and use business premises at all times during the income year that you use mainly to conduct your personal services work, that you have exclusive use of, and that are physically separate from your home (or an associate’s home) and from your client’s premises. The premises need to show that the business operates from its own place of business.
This is why the test is hard to satisfy in modern service industries. Plenty of legitimate businesses work remotely, but PSI law has its own criteria. A home office may still be deductible under ordinary tax rules. It often does not satisfy this PSI test.
What usually helps, and what usually hurts
Contract terms: fixed-fee outcomes, milestone delivery and defect liability tend to help; hourly billing and ongoing labour supply tend to hurt.
Client mix: multiple unrelated clients from market-facing activity tends to help; one dominant client tends to hurt.
Tools and systems: your own equipment and workflow tends to help; client equipment and close operational control tend to hurt.
Delivery model: team-based delivery or genuine subcontracted production tends to help; work that depends almost entirely on you tends to hurt.
Location: separate business premises tend to help; a home office or the client’s office only tends to hurt.
Do not self-assess by business name, ABN, or company structure. Self-assess by evidence.
The documents that matter are the signed contract, scope of work, invoices, timesheets, marketing records, equipment ownership, subcontractor agreements, and year-end client totals. If those records point in different directions, fix the position early. It is much cheaper to restructure before the ATO asks questions than to defend a weak PSI position after the fact.
PSI Rules Applied Your Deduction and Tax Outcomes
Once the tests are applied, your tax position usually goes down one of two paths. The difference is practical, not academic.
Path one as a personal services business
If you pass the relevant tests, or the ATO has issued you a personal services business determination, you’re treated as conducting a personal services business. The income is still PSI, but the PSI rules don’t apply to it: there’s no attribution and no PSI-specific limit on deductions.
Commercially, this is the cleaner path. Your deductions are treated more like those of an ordinary business, assuming they otherwise satisfy normal tax rules. The structure you use also has more room to operate as intended.
If you’re unsure whether you pass, have unusual circumstances that stop you passing a test, or get 80% or more of your PSI from one client without passing the results test, you can apply to the ATO for a personal services business determination.
Many contractors want to be here. Not because it creates magic tax savings, but because it aligns tax treatment more closely with how the business runs.
Passing the tests doesn’t put a structure beyond challenge. In TR 2022/3 and its Part IVA guideline PCG 2025/5 (finalised in November 2025), the ATO says Part IVA can still apply to a personal services business, and it flags higher risk where net PSI is split with an associate or ends up in an entity taxed at a lower rate than the person who did the work.
Path two where the PSI rules bite
If you fail the tests, the restrictions matter quickly.
The income is attributed back to the individual who performed the work, unless the entity pays it to them as salary or wages promptly (by the 14th day after the end of the PAYG payment period in which it was received). That’s the central consequence. A company or trust can’t retain that income at entity rates or split it across family members if the PSI rules apply, and the entity’s deductions against it are broadly limited to what the individual could have claimed.
The ATO’s PSI guidance explains the self-assessment tests, when to apply for a personal services business determination, and the deductions you lose when the PSI rules apply. Client concentration and the results test are where most positions are won or lost: if 80% or more of your PSI comes from one client, the results test (or a determination) is the only way out of the rules.
This shows the trade-off. The argument over PSI isn’t just technical. It changes after-tax cash.
The mistake isn’t only paying more tax. It’s planning as though the entity can keep or split income, then finding out later that it never could.
Deduction comparison
The list below is a practical guide only. Specific facts still matter.
Rent, mortgage interest, rates and land tax for your home: a personal services business can claim the business-use portion under ordinary rules; when the PSI rules apply, none of it is deductible against PSI.
Home office running costs (power, heating, lighting, phone, internet): deductible under ordinary rules either way, with records separating private use.
Payments to associates (such as a spouse) for non-principal work like bookkeeping, invoicing or admin: may be deductible for a personal services business if genuinely incurred and reasonable; not deductible when the PSI rules apply (and not taxed in the associate’s hands).
Payments to associates for principal work: deductible in both cases if genuinely incurred for work actually performed.
Super for associates: when the PSI rules apply, not deductible for an associate doing only non-principal work, and limited to the super guarantee minimum for an associate doing principal work.
Costs of gaining work, income protection, public liability and professional indemnity insurance, and tax agent fees: generally still deductible when the PSI rules apply.
Travel, equipment and other expenses tied to earning the income: deductible under ordinary rules for a personal services business; when the PSI rules apply, generally only to the extent an employee doing the same work could claim them.
What this means in day-to-day decisions
A few patterns come up repeatedly.
Using a company isn’t a shield: A company can still receive PSI, but the tax outcome may flow back to the individual.
Family payment plans often fail: When the PSI rules apply, payments to a spouse or relative for support work such as bookkeeping or admin aren’t deductible, and paying them for work they didn’t perform is exactly the sort of arrangement these rules (and Part IVA) target.
Bundling matters: Where a contract includes substantial goods, software, or equipment, the PSI position may be different. But the economics must be real, not cosmetic.
If you’re deciding whether to expand, subcontract, lease premises, or keep operating solo, these outcomes should inform the decision early. Restructuring after an ATO query is always harder than setting up correctly from the start.
Managing Your PAYG GST and BAS Obligations with PSI
Once PSI is in the picture, your admin process has to match the tax outcome. Good intentions don’t help if the BAS, year-end accounts, and individual return all tell different stories.
PAYG and attribution need to line up
If the PSI rules apply and income is attributed to the individual, your tax planning needs to reflect that. Don’t let the company books suggest one outcome while the individual return reports another.
That usually means checking:
Whose return carries the income
Whether PAYG instalments are realistic for the person ultimately taxed
Whether any salary, drawings, or distributions match the PSI treatment
A common error is to focus only on invoicing and forget attribution. The ATO won’t.
If a company, trust or partnership doesn’t pay the PSI out promptly as salary or wages, it takes on extra PAYG withholding obligations for the attributed amount. The ATO lets you work this out as 70% of the gross PSI received in the PAYG payment period, or as a percentage based on the previous year’s net PSI, and the obligation continues until the PSI rules stop applying.
GST is separate from PSI
People often get confused here. PSI and GST are not the same question.
You can still have a GST obligation even if the income is PSI. If your services are taxable supplies and you’re required to be registered, GST collection and reporting still need to happen in the ordinary way. PSI doesn’t cancel BAS responsibilities.
That’s why BAS coding needs to be reviewed alongside the income tax position, not after it.
Reporting PSI in your return: sole traders with PSI answer the PSI questions at P1 in the Business and professional items schedule. Where the PSI rules apply, net PSI from P1 goes to item 14 of the supplementary tax return, not to business income at item 15. If PSI was attributed to you from a company, trust or partnership, it’s reported at item 9 (Attributed personal services income), and the entity answers the PSI questions in its own return.
A BAS checklist that avoids messy corrections
If your business earns personal services income, keep the process tight:
Review contract wording: Make sure the BAS treatment and year-end tax treatment don’t contradict the deal.
Track entity and individual records separately: This matters if income has to be attributed.
Check mixed activities carefully: Property investors who also consult often blur expenses across rental and service activity. Blurred deductions become dangerous here.
Document AI-assisted work properly: If software tools contribute to delivery, keep records showing what the client paid for and who provided the substantive service.
Reconcile before lodgement: BAS figures, payroll records, and annual accounts should tell one coherent story.
Clean BAS lodgements don’t prove your PSI position is right, but inconsistent BAS lodgements often help the ATO find where it’s wrong.
The biggest PSI mistakes usually start with a reasonable assumption. “I’ve got an ABN, so I’m a business.” “I’ve incorporated, so the company pays the tax.” “I work from home, so I have business premises.” None of those statements is automatically enough.
The common traps
Some errors are repeated so often that they’re worth naming plainly.
Treating one big client as several clients: Different projects, departments, or purchase orders don’t create unrelated clients.
Writing hourly contracts and hoping conduct will save them: If the document says labour supply, it’s hard to argue later that you were engaged for a result.
Paying associates without matching substance: When the PSI rules apply, even genuine admin work by a spouse isn’t deductible, and payments that are really profit distribution dressed up as wages are a Part IVA risk as well.
Relying on a home office as a PSI escape hatch: A legitimate home office doesn’t usually solve the business premises test.
Mixing rental and consulting records: Property investors who also invoice for advisory or project work often contaminate their files by using the same accounts, cards, or descriptions.
Strategic decisions that can help
Restructuring can help, but only when the commercial reality changes with it.
A better structure on paper won’t beat poor facts. A company can be useful for asset protection, branding, continuity, or non-PSI income streams. But if all roads still lead back to one person selling their own labour to one main client, the PSI problem usually remains.
What tends to help is changing the business model, not just the entity.
Better moves
Shift to project pricing where appropriate: If clients buy outcomes, the contract should say outcomes.
Build unrelated client depth: Market-facing lead generation matters more than cosmetic diversification.
Use real delivery capacity: Staff or subcontractors performing substantive work can change the profile of the business.
Separate activities cleanly: If you hold rental properties and also consult, keep contracts, ledgers, and expense evidence distinct.
Review overseas arrangements early: Australians living overseas often assume non-residency solves everything. It doesn’t if Australian obligations still exist or Australian clients still pay for services tied to you personally.
Investors and overseas Australians need extra care
Property investors often drift into consulting without redesigning their systems. They might advise on renovation strategy, sourcing, tenant issues, or project coordination while also running rental schedules. That’s where blurred deductions become dangerous. The service income and property income may need very different treatment.
Overseas Australians face another practical problem. Distance creates delays. Returns get lodged late, records are incomplete, and a company is left carrying income that may need to be reattributed. Those matters are fixable, but only if someone reviews the facts before the lodgement position hardens.
A structure review can still be worthwhile. This comparison of sole trader vs company tax benefits is useful if you’re weighing whether your current setup still matches how you earn.
Restructuring works when the legal form follows the commercial substance. It fails when the paperwork tries to disguise the same old arrangement.
Stay Compliant and Confident with Expert PSI Guidance
Personal services income isn’t hard because the definition is hidden. It’s hard because the facts are usually mixed. A contractor can be independent in commercial terms and still trigger PSI rules in tax terms.
The safest approach is practical. Review each contract. Check whether the client is paying for a result or for your time. Measure client concentration across the full year. Keep records that show who provided equipment, who bore defect risk, and how the work was obtained. If you also have rental properties, overseas income issues, overdue lodgements, or BAS obligations, make sure those records stay separate and consistent.
The earlier you review PSI, the more choices you have. You can adjust contracts before renewal, diversify clients before year-end, and fix reporting before the ATO asks questions. Leaving it until after lodgement usually turns a planning issue into a correction issue.
If your file already feels messy, that’s not unusual. It does mean you should get the position checked properly.
Personal Services Income FAQs
Does using a company stop income from being PSI
No. A company can receive the invoice payment, but the PSI rules can still attribute that income back to the individual who earned it through their own efforts.
Can I avoid PSI by adding materials or software to the invoice
Not automatically. The issue is substance. If more than half the value of the contract is still for your labour, skills, or expertise, the whole contract can still be PSI.
I work for one main client and a few small ones. Am I safe
Not necessarily. If 80% or more of your PSI comes from one client (and its associates), you can only self-assess as a personal services business by passing the results test; otherwise you need a personal services business determination from the ATO. Small side jobs don’t always change that outcome.
Does a home office mean I pass the business premises test
Usually no. A home office may still be valid for ordinary tax purposes, but that’s not the same as satisfying the PSI business premises test.
I live overseas now. Do PSI rules still matter
They can. If you’re still earning income connected to Australian obligations or billing Australian clients for your own services, the PSI question may still need review as part of your broader tax position.
I’m behind on lodgements. Should I wait until everything is perfect
No. Late files usually get harder, not easier. It’s better to review the PSI position, sort the records you have, and fix the lodgement strategy before the issues compound.
How do I get help with this from the ATO?
The ATO provides guidance through ato.gov.au, the Small Business Support Line (13 28 66), and Online Services for individuals and businesses. For complex situations, a registered tax agent provides advice tailored to your specific circumstances and professional indemnity protection. You can verify agent registration at the TPB register at tpb.gov.au.
What records do I need to keep for tax purposes in Australia?
Most tax records must be kept for five years from the date of lodgement or the date the transaction occurred, whichever is later. Records must be in English or convertible to English and must be sufficient to explain the income and deductions in your return. The ATO can request records at any time during the retention period.
When do I need a registered tax agent in Australia?
Consider a registered tax agent when your affairs involve multiple income sources, business activity, investment properties, capital gains, or overseas income. Agents extend your lodgement deadline, provide safe harbour protection, and take professional responsibility for the advice given. Verify registration at tpb.gov.au.
How does the ATO calculate penalties for compliance failures?
The failure to lodge penalty is based on penalty units ($364 per unit from 1 July 2026), accruing per 28-day period for late returns and BAS lodgements. Incorrect information penalties range from 25% to 75% of the tax shortfall depending on whether the behaviour was careless, reckless, or intentional. Proactive disclosure before an audit begins typically results in significantly reduced penalties.
What is the difference between tax avoidance and tax minimisation?
Tax minimisation is the legal arrangement of your affairs to reduce tax — claiming all eligible deductions, using appropriate structures, and timing income and expenses. Tax avoidance involves arrangements that technically comply with the law but achieve outcomes parliament did not intend. The ATO can apply Part IVA anti-avoidance rules to cancel benefits from avoidance arrangements.
If your contracting, consulting, property, BAS, or overseas tax situation has drifted into uncertainty, Australia Wide Tax Solutions can help you get clear on your PSI position, fix overdue lodgements, and bring your reporting back into line with how you earn. Our team works with individuals, contractors, investors, and small businesses across Australia, with practical support for returns, BAS, rental schedules, and complex compliance issues.
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