The personal services income (PSI) rules explained

Is your income PSI at all?

Income is personal services income when it's mainly (more than 50% of the contract's value) a reward for your own personal effort or skill, rather than for a product, materials or other people's labour. Most day-rate IT and data contracts are squarely this: the client is paying for your skills. If your income is mainly for something else, the PSI rules stop here and don't apply.

Ordinary employment income paid by a labour-hire firm or agency (agency PAYG in our structures guide) is outside the PSI rules. The rules can apply when you provide services as a sole trader or through a personal services entity such as your own company or trust. Employment by your own personal services entity is a separate case under the ATO ruling.

Step 1: the results test

The results test is checked first, and passing it makes you a personal services business (PSB) regardless of how many clients you have. All three limbs have to hold for at least 75% of your PSI in the year:

• You're paid to produce a specified result, not simply for hours or days worked.
• You supply the plant, equipment and tools of trade the work needs.
• You're liable, at your own cost, to fix defects in the work.

Being paid a day rate for your time, rather than for a defined deliverable, fails the first limb on its own, which is why the results test is the one the ATO scrutinises hardest for contractors billing by the day.

Step 2: the 80% rule

If you don't meet the results test, the next question is how concentrated your client base is. Where 80% or more of your PSI for the year comes from one client and its associates, the three tests below can't be self-assessed at all: you either need an ATO personal services business determination, or the PSI rules apply. Below 80%, you can self-assess against any one of the three.

Obtaining work through an agency matters here: the ATO treats the agency, not the end client, as your source of PSI, so one agency placing you across several client sites for the year still counts as one source for this rule.

Step 3: the other three tests

Below the 80% threshold, meeting any one of these three also makes you a PSB:

• Unrelated clients test: PSI from two or more unrelated clients, each won by making offers to the public (advertising, a website, tenders), not found through a single agency.
• Employment test: you engage one or more entities, not your associates unless they genuinely do the work, to perform at least 20% of the principal work by market value, or you have an apprentice for at least half the year.
• Business premises test: you use business premises mainly for the work, exclusively yours, physically separate from your home and from every client, for the whole year.

If the rules apply

For a sole trader, the PSI rules restrict the types of deductions available; the income is already derived by the individual. For a personal services entity, they restrict deductions and attribute net PSI to the individual who mainly earned it in the same income year, even if the entity retains the cash. The entity will generally have PAYG withholding obligations. Our day rate calculator does not model retained PSI in the company column as a tax saving.

A signpost, not a determination

The tests turn on facts a calculator can't fully capture: what your contract actually says about who fixes mistakes, or whether clients found through an agency are truly “unrelated”. The ATO can also issue a personal services business determination that overrides your own self-assessment. Work through the tests as a starting point, keep the evidence (contract terms, invoices, how work was won), and get a registered tax agent to confirm anything the outcome turns on.