The quick answer
PSI is income produced mainly (more than 50%) from your skills or efforts as an individual. It can be earned as a sole trader, or through a company, partnership or trust.
Having PSI does not, by itself, mean the PSI rules apply. That depends on a set of tests, applied for each income year.
When the PSI rules apply, they affect how the income is reported and which deductions can be claimed against it.
The harder part: applying the tests to your own contracts and clients, and getting the answer right each year.
The definition is one sentence. The tests aren’t.
The ATO describes personal services income as income produced mainly from your skills or efforts as an individual. Its examples include financial professionals, information technology consultants, engineers, construction workers and medical practitioners, but PSI is not limited to those fields.
Earning PSI is only the starting point. The next step is working out whether the PSI rules apply to that income, and that is done through a series of tests.
The results test looks at whether, for at least 75% of your PSI, you are paid to produce a specific result, are required to provide the equipment or tools needed, and are required to fix mistakes at your own cost. Where it isn’t passed, the 80% rule and the other tests (unrelated clients, employment and business premises) come into play.
Each test turns on the detail of your contracts and on how you actually work. The same kind of work can pass under one arrangement and not under another.
If you are a personal services business for the year, the PSI rules don’t apply to that income. If you are not, they do.
Two contractors, same income, different deductions
Two contractors earn about the same from similar work. The PSI rules apply to one of them and not to the other.
The difference comes down to how each one is paid, who supplies the tools, who carries the cost of fixing mistakes, how many clients each has and how those clients came to engage them.
Six questions that decide whether the rules apply
QUESTION 1
Is more than half the income for your own skills or effort?
It is worked out from your contracts and invoices, not from your job title.
QUESTION 2
Are you paid for a result, or for your time?
Being paid to produce a specific result is one of the conditions of the results test.
QUESTION 3
Who provides the tools, and who fixes mistakes?
Both are conditions of the results test, and both depend on what your contracts require.
QUESTION 4
Does 80% or more come from one client?
If it does and the results test isn’t passed, the PSI rules generally apply unless you hold a determination from the ATO.
QUESTION 5
How do your clients come to engage you?
The unrelated clients test looks at whether the work came from offers made to the public, not only at the number of clients.
QUESTION 6
Has anything changed since last year?
The tests are applied for each income year, so last year’s answer can’t simply be carried forward.
There is no single answer to any of these. Each one depends on your own situation. Working them out is what we do every day.
What getting it wrong can cost
Deductions claimed that the rules don’t allow. When the PSI rules apply, rent, mortgage interest, rates and land tax for a residence can’t be claimed against PSI, and neither can payments to an associate for non-principal work.
PSI not declared as PSI. The ATO says PSI still needs to be declared in your tax return, even where the PSI rules don’t apply.
A return that has to be amended, with interest and possibly penalties, because the tests were applied the wrong way.
An arrangement the ATO looks at more closely. Even where the PSI rules don’t apply, the general anti-avoidance rules may apply if the main purpose of an arrangement is to obtain a tax benefit.
Does this sound like you?
Most of my income comes from one client.
I’m paid by the hour or by the day.
I work under an ABN, mostly at my client’s premises.
I pay my spouse or a family member to help with the paperwork.
I claim part of my rent or mortgage for a home office.
I contract through my own company or trust.
I’ve never worked through the PSI tests.
If even one of these is you, it’s worth a quick conversation. Sorting it out early is almost always easier than fixing it after the ATO gets in touch.
Common questions
I’m a sole trader. Can PSI still apply to me?
Yes. PSI can be earned directly as a sole trader, as well as through a company, partnership or trust.
I passed the tests last year. Do I need to check again?
Yes. The tests are applied for each income year, and a change in your clients or contracts can change the result.
What if I’m not sure whether I pass a test?
You can apply to the ATO for a personal services business determination if you are unsure whether you have passed a test, or if unusual circumstances prevented you from passing one. We can tell you whether that is worth doing.
How much does it cost?
It depends on your situation, so we give you the fee before any work starts. Asking for a quote costs nothing.
