Is Your Income Caught By The PSI Rules? What It Means For Your Tax
- G&A Editorial Team
- 3 days ago
- 4 min read
If you invoice through an ABN, a company, or a trust for work you do yourself - think IT contractors, tradies working as subcontractors, consultants, beauty and wellness professionals, or anyone billing for their own time and skill - there's a good chance your income falls under the ATO's Personal Services Income (PSI) rules. And in 2026, the ATO is paying closer attention than ever.
Here's a common scenario: a contractor sets up a company, starts invoicing a client for their work, and assumes that because the income lands in a company account, it's taxed at the lower company rate. Then tax time comes around, some deductions get knocked back, and the accountant explains the income was never eligible to be treated as business income in the first place. It was PSI all along.
What Is Personal Services Income (PSI)?
Personal services income is income that's mainly a reward for your personal effort or skill - not for selling a product, supplying materials, or running a broader operation with staff and assets. The general rule of thumb: if more than 50% of what you're paid under a contract is for your labour, knowledge, or expertise, that income is likely PSI, regardless of whether it's paid to you directly or to a company or trust you use to invoice.
A few examples that typically count as PSI:
An IT contractor billing hourly for their own coding work
A hairdresser or beauty therapist renting a chair and billing for services personally performed
A tradie working as a subcontractor, paid mainly for their own labour rather than materials or a crew
A consultant invoicing through their own Pty Ltd for advisory work they personally deliver
What typically does not count as PSI: income mainly generated from selling products, supplying materials and equipment, or running a business with genuine staff doing the bulk of the work.
Why The PSI Rules Matter For Your Tax
If your income is classified as Personal services income (PSI) and you don't qualify as a personal services business (PSB), the ATO effectively looks through your company or trust structure and attributes the income back to you personally, taxed at your individual marginal rate up to 45% instead of the lower company tax rate. On top of that, several deductions get restricted, including things like paying a spouse who isn't genuinely doing the work, or claiming certain home-office and rent expenses that an ordinary business could claim.
If the ATO later reviews your return and decides PSI should have applied, it can amend prior years and issue a tax bill with interest and penalties attached which is exactly the kind of surprise nobody wants.
The 4 PSI Tests: How To Check If You're A Personal Services Business
To be treated as a personal services business (PSB) and access normal business tax treatment instead of PSI attribution, you need to pass at least one of these tests:
Results Test - You're paid to produce a specific result, you use your own tools and equipment, and you're liable to fix your own mistakes at your own cost. This needs to apply to at least 75% of your relevant income.
Unrelated Clients Test - You have two or more clients who aren't related to you or to each other, and you found the work through public advertising or another genuine offer to the public.
Employment Test - You engage other people (not related to you) who perform at least 20% of the work by market value, or you have an apprentice.
Business Premises Test - You maintain and use business premises that are separate from your home and from your client's premises, exclusively for your work.
Important caveat: If 80% or more of your PSI comes from a single client in a year, only the Results Test lets you self-assess as a PSB. For the other three tests, you'd need to apply to the ATO directly for a Personal Services Business Determination.
(For the full official criteria, see the ATO's guide on working out if the PSI rules apply.)
PCG 2025/5: How the ATO's New PSI Guidance Affects You
Since the ATO issued PCG 2025/5, one thing is clear: passing a PSB test doesn't automatically mean you're in the clear.
It gets you out of the strict PSI rules but Part IVA, the ATO's general anti-avoidance rule, can still apply. If your structure is mainly there to reduce your personal tax rather than for real business reasons, the ATO can still challenge it.
So passing the test is a good sign, not a guarantee.
What To Do If The PSI Rules Apply To You
Review how your contracts are structured - are you being paid for an outcome, or essentially for your time?
Check whether you'd genuinely pass one of the four tests, particularly the results test, which is the strongest position.
If most of your income comes from one client, be aware you likely can't self-assess and may need a formal ATO determination.
Avoid income-splitting arrangements that don't reflect real work being done by the other person.
If you're unsure, get a proper review before tax time rather than after the ATO flags it.
This is a separate question from worker classification under super law, but the two often go hand in hand for contractors so it's worth reading our earlier article, Contractor or Employee? The Superannuation Risks of Worker Misclassification, to understand both sides. You can be a legitimate contractor for super purposes and still have your income treated as PSI for tax purposes - the two rules are assessed independently. If you're a contractor or sole trader in Perth and you're not sure where you stand on either front, it's worth having a proper conversation before your next return is due.
Not sure if the PSI rules apply to your business structure? Book a consultation with Gordon Q.C Du & Associates and get clarity before tax time, not after.
Disclaimer: This post contains general information only and does not constitute specific tax or financial advice. Please consult a registered tax agent regarding your specific circumstances.
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