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Do PSI rules apply to you?

If you are a sole trader or running a business through an entity (whether that is a company, partnership or trust), and the income you earn is related to your personal skills, expertise or labour, don’t walk away, as PSI rules may apply to you.

What is PSI

Personal services income (PSI) is income that is mainly a reward for an individual’s personal efforts or skills.

PSI is not specific to any particular industry, profession or trade. However, some common examples identified by ATO include:

  • financial professionals
  • information technology consultants
  • engineers
  • construction workers
  • medical practitioners.

PSI does not affect you if you’re an employee receiving only salaries and wages. But, if you are operating through an entity, such as a company, partnership or trust, and are an employee of that entity then the PSI rules may still apply.

The PSI rules

The PSI rules were introduced to prevent individuals from shifting or splitting their PSI with other individuals or entities in an attempt to pay less tax. In other words, the PSI rules treat income earned by the individual but paid to the entity (that is, paid to the trust, company or partnership) as the income of the individual.

Work Out if PSI rules apply to you

Step 1: Determine if your income includes PSI

You need to examine the income received from every single contract or job. If more than 50% of the income received for a contract or job was for labour, skills or expertise, then all the income from that contract or job is deemed to be PSI.

Step 2: Take personal services business (PSB) tests

If you pass one of the tests, you are qualified as a PSB and the rules won’t apply to your PSI. However, if more than one individual is generating PSI through a business entity, every individual need to work through the tests separately.

Result Tests

To pass the results test in an income year, you need to meet the following three conditions:

  • Paid to produce a specific result
  • Required to provide the equipment or tools
  • Required to fix mistakes at your own costs

You may find that some of your business contracts meet the three conditions of the test and some don’t. To pass the results test, you need to meet all three conditions for at least 75% of the PSI for the income year.

If you pass the test, your business is a personal services business (PSB) for that income year and the PSI rules don’t apply. If you don’t pass the test, proceed to the 80% rule.

The 80% rule

If 80% or more of you PSI income comes from one particular client (and their associates), PSI rules apply. However, you believe you will pass the employment test or business premises test or unusual circumstances stopped you from passing any of the tests, you can apply to the ATO for PSB determination

If less than 80% of you PSI income comes from one particular client (and their associates), proceed to the remaining test.

The remaining test

If you pass one of the remaining tests below, your business is a personal services business (PSB) and the PSI rules do not apply.

  • Your PSI is produced from two or more clients who are not related or connected, and the work must be obtained by making offers to the public or sections of the public.
  • You employ or contract others to perform at least 20% (by market value) of the principal work or employ one or more apprentices for at least six months of the income year
  • your business premises meets all of the following conditions:
    • Used mainly for personal services work
    • Used exclusively by you (it means you must own or lease the premises)
    • Physically separate from any premises you use for private purposes (such as your home)
    • Physically separate from your clients’ premises

If PSI rules apply to you, but if you believe your circumstances were unusual, you can apply to the ATO for PSB determination

The Personal Services Income Online Tool 

If you find these tests too confusing, you can use the online tool provided by the ATO. By answering a few questions, you can work out whether you earned PSI, and if the PSI rules apply to that income.

What happen if PSI rules apply to you

If the PSI rules apply, you cannot claim the following deductions against that income:

  • rent, mortgage interest, rates or land tax for your home (or your associate’s home)
  • payments to your spouse, or other associate, for support work such as secretarial duties
  • expenses that you would generally not be able to deduct as an employee.

The PSI, less allowable deductions, will be attributed to the individual who performed the services, and the individual declares the income in their individual tax return.