Personal Services Income (PSI) Rules Explained for Australian Contractors

Are you an independent contractor, consultant, or professional earning income based on your personal skills and effort? If so, you may be subject to Personal Services Income (PSI) rules under Australian tax law. These rules are designed to ensure fairness in how income is taxed and to prevent inappropriate income splitting.

In this blog, we’ll explain what PSI is, who it applies to, and how you can determine whether you qualify as a Personal Services Business (PSB)—potentially unlocking valuable tax deductions and compliance benefit.

What is PSI?

Personal Services Income (PSI) is income that is received by you, or another entity that is mainly a reward for your personal effort or skill. For example, income you earn as an independent contractor or income received by a company or trust that you provide your personal services through. The PSI rules are integrity rules that improve fairness, by preventing those not carrying on a personal services business, from:

• diverting their PSI that is an entity or person associated with them who will pay less tax on it, and

• stopping them, or the entity receiving it, from claiming deductions for some expenses they couldn't claim if they had received the PSI as an employee.

Who can earn PSI?

You can receive PSI in almost any industry, trade or profession. Common examples include but are not limited to:

• financial professionals

• information technology consultants

• engineers

• construction workers

• medical practitioners.

Check if PSI rules apply to the Individual:

If you are able to self-assess as a PSB (Personal Service Business) then PSI rules do not apply.

To self-assess as a PSB, you need to either :

1. Pass Result test in relation to at least 75% of your PSI
   OR

2. Meet any one of another PSB tests and pass 80% rule

Other PSB tests are

• Unrelated Client test

• Employment Test

Business premises test

What is Result Test?

To pass the results test, you need to meet all 3 of the following conditions for at least 75% of your PSI you earn:

• You must be paid to produce a specific result.

• You are required to provide equipment or tools (if required).

• You are required to fix mistakes at your own cost.
  

What is Unrelated Client test?

To pass the unrelated clients test in an income year, you must meet both of the following conditions:

• You must have received PSI from 2 or more unrelated clients.

• There must be a direct connection between the offer to the public and you being engaged to perform the work.
  

What is Employment test?

To pass the employment test, your business must employ or contract others to help perform work that generates your PSI, and you must meet one of the following conditions:

• at least 20% of the principal work is performed by others

• one or more apprentices are employed for at least 6 months of the income year.
  

What is Business Premises Test?

You will pass the business premises test if at all times in the income year you maintained and used a business premises which meets all of the following conditions:

• used mainly to gain or produce PSI

• used exclusively by you

• physically separate from your private premises

• physically separate from your clients' premises
  

80% Rule:

80% rule condition applies if you are using Unrelated client test, employment test and business premises test and you should pass 80% rule along with any of the 3 tests. The purpose of the 80% rule is to look at how much of your income comes from one client and their associates.

• If 80% or more of your PSI comes from one client and their associates, you do not meet the 80% rule. The PSI rules will apply.

• If less than 80% of your PSI comes from one client and their associates you do meet the 80% rule. If you also meet one of the unrelated clients, employment, or business premises tests, you can self-assess as a PSB.

You need to work out the amount of PSI that comes from each client and their associates in an income year.


Conclusion:

Navigating PSI rules can be complex, especially when determining your eligibility for PSB status. By understanding the result test, unrelated client test, employment test, and business premises test, you can better assess your tax obligations and opportunities. If you're unsure how PSI applies to your situation, reach out to our team at 7 Bells for tailored advice and support in structuring your income and business operations effectively.

Need help with PSI compliance? Contact us today at info@7bells.com.au.

Reference:

1. Australian Taxation Office – Personal Services Income: ATO – Personal Services Income Overview