Personal Services Income (PSI): What It Means for Contractors and Consultants

If you operate through a company or trust or work under your own ABN, you may have heard of Personal Services Income (PSI). PSI is one of the most misunderstood areas of tax law, particularly for contractors and consultants who consider themselves to be running a business.

At its core, PSI is about how income is earned, not the structure you use.

What is Personal Services Income?

Personal Services Income is income that is mainly generated from an individual’s personal effort, skill, or expertise. If clients are effectively paying for you to perform the work, rather than paying for a broader business operation, PSI may apply.

PSI is common in industries such as IT, engineering, project management, consulting, healthcare, and trades. Importantly, it can apply regardless of whether you operate as a sole trader, company, or trust.

Why PSI Matters

The PSI rules were introduced to prevent income splitting and the use of business structures solely to reduce tax. Where income is classified as PSI and the relevant tests are not met, the ATO can treat that income as belonging to the individual who performed the work, even if it was invoiced through a company or trust.

This can limit deductions, restrict distributions to family members, and reduce the tax effectiveness of the business structure. In some cases, it can also result in unexpected tax adjustments if PSI has not been correctly considered.

PSI vs a Personal Services Business

A key distinction is between PSI and a Personal Services Business (PSB).

PSI describes the nature of the income. A PSB, on the other hand, is a business that earns PSI but operates in a way that demonstrates genuine commercial independence. Where a business qualifies as a PSB, the PSI rules generally do not apply in a restrictive way.

How the ATO Assesses Whether You Are a PSB

The ATO uses a series of tests to determine whether a contractor or consultant is operating as a genuine business. While the rules are technical, the underlying question is practical: are you being paid like an employee, or operating like an independent business?

The results test is often the most significant. Where work is performed for a fixed price, the contractor supplies their own tools or equipment, and is responsible for fixing defects at their own cost, the arrangement is more likely to reflect a genuine business.

Client concentration is also important. If 80% or more of income comes from one client, this can limit the ability to self-assess as a PSB and increases PSI risk. Businesses with multiple unrelated clients, particularly where work is obtained through advertising or direct marketing, are generally in a stronger position.

The ATO also looks at whether a business employs others to perform income-producing work, and whether it operates from dedicated business premises. While no single factor is decisive on its own, these indicators collectively help determine whether PSI rules apply.

What Happens If PSI Applies?

Where income is classified as PSI and the business does not qualify as a PSB, the rules can restrict how that income is taxed.

Income splitting through trusts or companies is generally limited, meaning profits may need to be attributed back to the individual who performed the work. Certain deductions, particularly payments to associates that are not at market value, may also be denied.

While legitimate business expenses are still deductible, the PSI rules narrow what the ATO considers acceptable in this context.

Personal Services Income (PSI) Examples

Example 1: Long-term IT contractor
An IT contractor works full-time for one organisation for most of the year and is paid a daily rate. The contractor uses the client’s systems, works under the client’s direction, and does not take on commercial risk. Even though invoices are issued through a company, the income is mainly from the contractor’s personal labour and is likely to be PSI.

Example 2: Consultant with one dominant client
A management consultant operates through a trust but earns more than 80% of their income from a single client. The work is billed hourly and sourced through a recruitment agency. This arrangement commonly triggers PSI concerns, particularly if the consultant cannot meet the Personal Services Business tests.

Example 3: Fixed-fee professional services
A professional service provider charges clients a fixed price per engagement and is responsible for delivering agreed outcomes. If work needs to be redone, it is corrected at no additional charge. The provider supplies their own equipment and markets their services publicly. While the income may still be PSI, this structure is more likely to qualify as a Personal Services Business.

Common PSI Risk Scenarios

We commonly see PSI issues arise where contractors work on long-term engagements for a single client, are paid on an hourly or daily rate, and operate under the client’s direction. These arrangements can closely resemble employment, even when invoiced through a company or trust.

By contrast, businesses that offer fixed-fee services, work for multiple clients, carry commercial risk, or employ staff to deliver work are often better positioned to manage PSI exposure.

Getting It Right

PSI is not something to ignore, but it also doesn’t mean your structure is automatically wrong. In many cases, the outcome depends on how contracts are structured, how work is sourced, and how the business operates day-to-day.

At AWT Accountants, we regularly help contractors and consultants review their PSI position, assess PSB eligibility, and ensure their structure and tax treatment align with both the law and commercial reality.

If you’re unsure whether PSI applies to your business, a proactive review can provide clarity and reduce the risk of future issues.