Personal services income, or PSI, is the ATO’s label for income earned mainly from your own skills, effort or expertise — not from selling goods, hiring out equipment, or running a business with staff and assets. If you are a contractor, consultant, freelancer or tradie billing through a company or trust, there is a good chance your income is PSI. The rules on top of it decide whether you can keep profits in your company at the company tax rate, split income with a spouse, and claim the deductions you expected. If you fail the ATO’s tests, the income is attributed to you personally and taxed at your marginal rates — the company structure becomes, for tax purposes, mostly decoration.
Quick answer: what do the PSI rules do to a contractor?
The PSI rules are an anti-avoidance measure. They stop you diverting income earned from your own personal effort into a company, trust or partnership to pay less tax than you would as an individual. If the rules catch you, the net PSI is attributed to you personally — taxed at your marginal rates (up to 45% in 2026-27, plus the 2% Medicare levy), even though the invoice went out under your company’s name. And your deductions are limited to roughly what an employee could claim: home-office occupancy costs and payments to associates for non-principal work are off the table.
The PSI rules do not change your legal status: they do not affect your client contracts, ABN, GST registration, or whether you are running a business. (More on this in the FAQ.)
Is your income PSI at all? The 50% question
Income is PSI only if more than 50% of a particular contract’s value is a reward for your personal efforts or skills — judged contract by contract. An IT contractor billing hourly is earning PSI; a carpenter on a fixed kitchen price earns PSI on the labour component, not the materials markup; a business selling software licences or hiring out a truck is generally not, because the income is mainly for the asset.
Income is generally not PSI when it is for supplying goods, for the use of an income-producing asset, for licensing or royalties, or when it comes from a genuine business structure — substantial assets, multiple arm’s-length employees, and goodwill that does not live and die with one individual. If your income is not PSI, the rules do not apply. If it is, the question is whether you qualify as a personal services business.
The four PSB tests, in the order that matters
Qualifying as a personal services business (PSB) is how you escape the deduction limits and attribution. The ATO’s logic runs like a flowchart — and the order matters.
1. The results test — the strongest exit
You pass the results test for a contract when three conditions are all true: you are paid to produce a specific result (not for your time), you supply your own tools and equipment, and you are liable to fix defects at your own cost. If at least 75% of your PSI for the year meets all three, you are a PSB — full stop. The other tests and the 80% rule never enter the picture.
A freelance carpenter on a fixed price, bringing his own tools, with a rectification warranty he honours at his own expense, passes. A contractor paid by the hour to sit in a client’s team, using the client’s laptop, with the client wearing the cost of rework, does not.
The 80% rule — the gate, not a test
If you do not pass the results test, you hit the 80% rule: does 80% or more of your PSI in the income year come from one client, counting that client’s associates as the same client? The nickname “80/20 rule” misleads — this is not a test you pass and not a safe harbour. It is a gate. Coming in under 80% does not make you a PSB; it only unlocks the other three tests.
Two traps live here. Associates are grouped with the client — two companies in the same group count as one client. And the ATO applies the 80% rule per individual, not per entity. Fail the gate and the PSI rules apply — the only exit left is a PSB determination from the Commissioner (below).
2. The unrelated clients test
Under the 80% gate, you pass when you serve two or more unrelated clients and won the work by making offers to the public — advertising, a website, tendering — rather than through a labour-hire agency. Work won purely through a recruitment agency may fail this element even with several end-clients.
3. The employment test
You pass when employees or contractors you engage perform at least 20% of the principal work by market value, or you have at least one apprentice for half the income year or more. “Principal work” is the actual service the client pays for — not admin. A subcontractor doing 25% of the labour value counts; paying your spouse to do the invoicing does not, and that payment is likely not deductible anyway.
4. The business premises test
You pass when, throughout the income year, you maintain and use business premises where you mainly conduct the PSI work, used exclusively by you and physically separate from your home, your clients’ premises, and any premises used privately by you or your associates. A rented studio used only for your work qualifies; a home office or a desk inside a client’s building does not.
Worked example 1: the $180k IT contractor caught by the rules
Sam is a developer contracting through Samsoft Pty Ltd. In 2026-27 the company invoices one bank client $180,000 (excluding GST). Sam bills by the hour, works on the client’s laptop at the client’s office, and the contract has no rectification clause.
Is it PSI? Yes. Results test? Paid for time, no own tools, no defect liability — 0% of his PSI. The 80% gate? 100% of PSI from one client — the gate is shut, the PSI rules apply, and Sam cannot self-assess as a PSB.
Samsoft’s deductions are now limited. Allowed: professional indemnity insurance ($2,800), accounting fees ($2,200), apportioned home-office running costs ($1,500) — total $6,500. Denied: $12,000 of “rent” the company pays him for his home office, and $18,200 paid to his wife for admin. Net PSI = $180,000 − $6,500 = $173,500, attributed to Sam personally and payable to him promptly as salary or attributed with PAYG withholding. Sam’s tax on $173,500 in 2026-27:
| Item | Calculation | Amount |
|---|---|---|
| Income tax ($135,001–$190,000 bracket) | $31,020 + 37c × ($173,500 − $135,000) | $45,265 |
| Medicare levy (2%) | 2% × $173,500 | $3,470 |
| Total | $48,735 |
Sam’s plan was a $90,000 salary with the rest retained in the company at the 25% company rate. Instead the $173,500 is taxed at his marginal rates and $30,200 of planned deductions vanished. Run your own numbers with our income tax calculator.
Worked example 2: the one-client consultant through a trust
Maya is a marketing consultant invoicing through a family trust. In 2026-27 she earns $150,000 of PSI: $132,000 (88%) from one retail client and $18,000 from a side client. She bills monthly, works from the client’s premises, and has no rectification obligations — the results test fails and the 80% gate is shut.
Her plan — distribute $65,000 of trust income to her spouse — fails. The net PSI is attributed to Maya, the individual who did the work: the trust cannot distribute PSI-linked income to family who did not earn it, and the spouse’s admin payments are not deductible. Her position is the same as invoicing as a sole trader: most of the $150,000 taxed at 30c and 37c in the dollar, plus the 2% Medicare levy. The family trust, for this income, is an empty wrapper.
Worked example 3: the two-client consultant who stays a PSB
Dev is a data consultant invoicing through Dev Analytics Pty Ltd. In 2026-27 he earns $160,000 of PSI: $104,000 (65%) from a logistics company and $56,000 (35%) from a retailer — unrelated clients, both won through his own website and open tendering, not an agency. He bills hourly and does not pass the results test.
The 80% gate is open and he passes the unrelated clients test, so he is a PSB: no deduction limits, no attribution, normal company deductions, and profits can be retained at the company rate.
Under the ATO’s PCG 2025/5 guideline, even a PSB can be reviewed under the general anti-avoidance rules (Part IVA) if the arrangement looks like it exists mainly to pay less tax. Red flags: paying yourself well below a market salary, splitting income with family whose pay does not match their work, hoarding profits with no genuine business reason, borrowing company money for personal use. The low-risk zone: a salary reflecting the commercial value of your work — usually most of the profit — and retained profits only for a genuine purpose. Before choosing a structure for the wrong reasons, read our company tax rates guide for 2026-27 and our ABN vs ACN comparison.
Deduction limits: what survives and what does not
When the PSI rules apply, deductions are limited to roughly what an employee could claim:
| Deduction | Sole trader (PSI rules apply) | Company/trust (PSI rules apply) | Company/trust (PSB) |
|---|---|---|---|
| Home-office occupancy costs (rent, mortgage interest, rates, land tax) | Not deductible | Not deductible | Normal business rules |
| Home-office running costs (heating, lighting, internet) | Deductible (apportioned) | Deductible (apportioned) | Deductible |
| Payments to spouse/associate for admin (non-principal work) | Not deductible | Not deductible | Deductible if reasonable |
| Payments to associates for principal work | Deductible if reasonable | Deductible if reasonable | Deductible |
| Arm’s-length employees/subcontractors | Deductible | Deductible | Deductible |
| Insurance, registration, licensing | Deductible | Deductible | Deductible |
| Advertising, tendering, costs of gaining work | Deductible | Deductible | Deductible |
| Tools and depreciation of income-producing assets | Deductible (over time) | Deductible (over time) | Deductible |
| Retaining profits in the company at the company rate | n/a | Not allowed — net PSI must be paid promptly as salary or attributed to the individual, with PAYG withholding | Allowed (but see PCG 2025/5) |
| Splitting income to a spouse/associate | n/a | Not allowed — PSI is attributed to the individual who did the work | Part IVA review risk if it does not reflect actual work |
If the PSI rules apply through an entity, the PSI is reported against you as the individual and the entity has PAYG withholding obligations. For a general refresher, see our tax deductions checklist for 2026-27.
PSB determinations: what a PSBD can and cannot do
Fail the 80% gate and self-assessment is closed — you need the Commissioner to agree you are a personal services business. A personal services business determination (PSBD) is available where you could reasonably be expected to meet the results, employment or business premises test, or where unusual circumstances stopped you meeting a test (or, for the unrelated clients test, stopped you meeting the 80% rule). “Unusual circumstances” is a real threshold: the Commissioner must be satisfied you would have passed but for them.
Three practical points. You apply through the ATO’s Personal services income tool or the Personal services business determination application form. Through a company, partnership or trust, you need a separate application for each person earning PSI. And a determination relates to a specific income year — it is not a lifetime pass. Relying on one obtained years ago, after circumstances changed, is an ATO red flag for review. The ATO’s application details are on the PSBD application page.
Common mistakes contractors make
- The 80/20 trap. Treating the 80% rule as a test you “pass” at 79%. It is a gate — under 80% only unlocks three more tests. Splitting invoices across related entities fails, because associates are grouped with the client.
- The retained-profits illusion. Passing a PSB test, then leaving profits in the company at the 25% rate indefinitely. PCG 2025/5 makes this high-risk under Part IVA unless you pay yourself a market salary and retain profits for a genuine business reason.
- Home-office rent paid to yourself. Your company “paying you rent” for the home office is denied — occupancy costs are off the table.
- Employee-style deductions. Mortgage interest, rates, land tax on the family home, and payments to a spouse for admin work do not survive.
- Assuming an agency placement protects you. A recruitment agency does not switch the PSI rules off — and agency-sourced work can fail the “offers to the public” element.
- Checking the 80% number at lodgement. By then the year is set. Track your biggest client’s share of PSI during the year, while you can still act.
Tips to stay on the right side
- Check your biggest client’s share early. That one percentage decides which tests you are allowed to attempt. Track it quarterly.
- Write contracts like a business. Fixed price for a result, your own tools, a rectification clause you honour — the three limbs of the results test, your strongest exit.
- Market yourself publicly. A website, advertising, open tendering. Evidence of offers to the public powers the unrelated clients test; agency-only history is thin evidence.
- Pay yourself properly. As a PSB, pay a salary reflecting the commercial value of your work. Below-market pay plus retained profits is exactly what PCG 2025/5 targets.
- Keep the evidence. Contract terms, client lists with percentages, marketing records, subcontractor invoices, leases. The tests turn on your specific facts.
- Reassess every year. PSB status is per income year, per individual. Last year’s position does not automatically cover this year.
Frequently asked questions
Does being caught by the PSI rules mean I am an employee?
No. The rules are a tax measure about deductions and attribution — they do not change your legal status, entitlements or client relationship.
I invoice through a company — surely the income belongs to the company?
Not when the PSI rules apply. Net PSI is attributed to the individual who did the work and taxed at their personal marginal rates. This is the single most expensive misunderstanding in contracting.
Can I beat the 80% rule by invoicing two companies in the same group?
No. A client and its associates count as one client, and the percentage is measured per individual, not per entity.
Does working through a recruitment agency help?
No. The rules look at the nature of the income and whether you qualify as a PSB, not who pays your invoice. Agency placements frequently fail the 80% rule, and agency-sourced work may not satisfy the “offers to the public” element of the unrelated clients test.
Can my company pay me rent for my home office and claim it?
No. Home-office occupancy expenses — rent, mortgage interest, rates, land tax — are not deductible when the PSI rules apply. Apportioned running costs like electricity and internet are still claimable.
I got a PSB determination a few years ago — am I covered?
Not automatically. A determination relates to a specific income year and your circumstances then. If your client mix, contracts or structure changed, reassess each year. Earning PSI alongside a side business? Read our side hustle tax guide, and GST-registered contractors should check our GST calculator. The ATO’s myTax 2026 PSI instructions summarise what to report.
The bottom line
The PSI rules reward contractors who genuinely run a business and penalise those who use a structure mainly to cut tax. The path is short: is the income mainly for your personal effort, do you pass the results test for 75% of it, does one client supply 80% or more, and if not, can you pass one of the other three tests? Work through it with real numbers before 30 June, not after — and if you are banking on a company structure to lower your rate, run the attribution maths first. The company does not make the PSI disappear; it just makes the paperwork more expensive.
