Personal Services Income (PSI)
How Part 2-42 of ITAA 1997 attributes income earned mainly from personal effort back to the individual regardless of business structure, the results test and three secondary PSB tests, the 80% single-client rule, deduction limits when PSI rules apply, and industry-specific application for IT contractors, consultants, medical professionals, and tradespeople.
Personal services income is income that is mainly (more than 50%) a reward for an individual's personal efforts or skills under Part 2-42 of ITAA 1997 (Divisions 84 to 87). If PSI rules apply, income earned through a company, trust, or partnership is attributed back to the individual and taxed at their marginal rate, overriding the entity's ability to retain profits at company rates or split income through distributions. The primary escape is qualifying as a personal services business by passing the results test for at least 75% of PSI.
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Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact ATO. Read our editorial scope →
What is personal services income
PSI is income that is mainly (more than 50%) a reward for the personal efforts or skills of an individual, under a particular contract or arrangement. If more than 50% of the consideration for a contract is for your own labour, skills, or expertise, the whole contract amount is treated as PSI under Part 2-42 of ITAA 1997 (Divisions 84 to 87). Only individuals can have PSI, but it can be received directly (sole trader) or through a company, trust, or partnership (a personal services entity). PSI rules apply regardless of business structure. PSI generally does not include income mainly from selling goods, using substantial income-producing assets, granting rights to property or IP, or ordinary business profits of a firm with meaningful structure and staff.
The results test (primary PSB test)
If you meet the results test for at least 75% of your PSI in an income year, you are conducting a personal services business (PSB) and the PSI rules do not apply. All three conditions must be met for 75% or more of PSI.
Secondary PSB tests (when results test fails)
If the results test is not met, three secondary tests can qualify you as a PSB, but only if less than 80% of your PSI in the income year comes from one client (and their associates). If 80% or more comes from one client, you must seek an ATO PSB determination.
Unrelated clients test
You pass if you gain PSI from two or more unrelated clients in the year and the work comes from making offers to the public or a section of the public (via website, advertising, labour-hire listing, or word-of-mouth standing), not just through one intermediary. Being placed via one labour-hire firm into multiple end-users often does not count as offering to the public.
Employment test
You pass if you engage one or more unrelated individuals (employees or contractors) to do at least 20% (by market value) of the principal work, or employ an apprentice for at least half the year. The ATO distinguishes principal work (the core service the client pays for) from ancillary or admin work. Hiring a bookkeeper or receptionist usually does not satisfy this test.
Business premises test
You pass if, for the whole year, you maintain business premises used mainly to conduct PSI-related activities, the premises are physically separate from your home and from your clients' premises, and they are exclusively used for your business. A spare bedroom or home office generally fails; a distinct leased office, workshop, or surgery dedicated to your practice tends to pass.
PSB determinations from the ATO
Where more than 80% of PSI comes from a single client (and associates), you may need to apply to the ATO for a PSB determination. A determination can cover up to 3 income years, giving medium-term certainty. You must show that despite high client concentration, you are operating a genuine business and would have met a PSB test but for unusual circumstances. If granted, the entity is treated as a PSB and PSI rules do not apply. The ATO has an online PSI decision tool that steps through the tests.
Consequences when PSI rules apply
If you do not qualify as a PSB (and no determination applies), Part 2-42 operates to look through your structure. PSI earned through a company, trust, or partnership is attributed to the individual who performed the services and assessed at their marginal rates. Income cannot be split at the entity level to associates in lower tax brackets.
Deductions still allowed
Salary or wages actually paid to the individual who did the work, superannuation contributions for that individual within caps, work-related expenses comparable to an employee's (certain travel, training, tools), and some insurance.
Deductions denied
Rent, mortgage interest, and occupancy costs for premises (unless separate business premises satisfy the business premises test), general administration and accounting beyond employee-equivalent claims, payments to associates for non-principal work or inflated admin services, and attempts to spread PSI through trust distributions or dividends.
Common scenarios by industry
PSI application varies significantly by industry, driven by how contracts are structured and whether the individual supplies tools, bears risk, and operates independently.
IT contractor through a Pty Ltd
Jaya in Canberra bills $200,000 through her Pty Ltd on a 12-month daily-rate contract with a single client. The client provides all equipment, the contract is terminable on notice, there is no explicit defect liability, and she works from home. Results test fails (time-based, no tools, no defect liability). 100% from one client means secondary tests cannot be self-assessed without an ATO determination. Part 2-42 attributes PSI to Jaya personally: approximately $185,000 (after limited employee-like deductions) taxed at her marginal rate. IT contractors are a headline ATO compliance focus group.
Plumber operating via company
Marcus in Townsville runs Plumbing Pty Ltd with $200,000 from 150 separate residential jobs on fixed-price quotes. He supplies all tools, vehicles, and most materials. He provides a 12-month workmanship guarantee and rectifies defects at his own cost. Results test: paid for a result (yes, fixed-price), provides tools (yes, substantial plant), liable for defects (yes, guarantee). Passes the results test. PSI rules do not apply. Treated as running a genuine contracting business with full access to normal business deductions and structuring.
Medical locum through trust or company
Dr Amara in Gold Coast works sessional locum shifts. Fees are for her personal professional services. Engagements are time-based at hospital or clinic, using clinic facilities, with limited defect exposure. Results test often not met. PCG 2025/5 specifically addresses medical professionals' use of entities and income splitting.
Management consultant
Ravi in Adelaide is a lone strategy consultant billing through his company. Income is primarily for his expertise and analysis. Unless clearly result-based project engagements, meaningful use of staff, or multiple unrelated clients obtained through genuine marketing, PSI rules often apply. Larger practices with teams and brand value may instead earn income from the business structure, not PSI.
ATO compliance focus for 2025-26
Recent ATO material and professional commentary highlight strong and increasing compliance focus on PSI. High-priority risk areas include IT and professional services contractors operating through companies or trusts (particularly where income is split to spouses or retained at company tax rates without commercial justification), one-client contractors (especially ex-employees re-engaged through entities), labour-hire and medical professionals using entities to access lower rates or income splitting. TR 2022/3 confirms close examination of whether income is truly from a business structure or PSI. PCG 2025/5 outlines risk zones for medical professionals.
Key statute references
The PSI rules are contained in Part 2-42 of ITAA 1997, supplemented by ATO rulings and practical compliance guidelines.
Statute references
- ITAA 1997 Part 2-42 (Divisions 84-87)
- ATO TR 2022/3 (PSI and personal services businesses)
- ATO PCG 2025/5 (Medical professionals and entities)
- ITAA 1997 Part 2-42 Divisions 84–87 (PSI attribution regime)
- ITAA 1997 s 87-18 (results test); s 87-20 (unrelated clients test); s 87-25 (employment test); s 87-30 (business premises test)
- TR 2022/3 (Personal Services Income — results test: Commissioner's view, worked examples)
- PCG 2025/5 (ATO compliance approach to PSI — green / amber / red risk zones; transitional treatment through 30 June 2027)
- CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1; ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 — contractor vs employee classification turns principally on the rights and obligations in the written contract. PSI rules engage only where the worker is genuinely operating as an independent contractor; misclassification puts the engager into PAYG-withholding and SG territory before PSI is even reached.
Frequently asked questions
What is the difference between PSI and ordinary business income?+
Can a tradesperson operating through a company avoid PSI rules?+
I am an IT contractor on a day rate through my Pty Ltd. Am I caught by PSI?+
What deductions are denied when PSI rules apply?+
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