Australia Personal Services Income (PSI) Rules Explained for Pty Ltd Contractors

Last updated: October 2026.

Most Australian contractors who run a Pty Ltd meet this rule sooner or later. A software developer billing one client by the day, a consultant placed through an agency, a locum: all of them earn income that depends on their personal effort. This guide explains the tests as the ATO sets them out, what happens if you fail, and how to see which side you are on. It is general information, so check your own facts with a registered tax agent.

What is personal services income?

PSI is income produced mainly (more than 50%) from your skills or efforts as an individual. The ATO counts the income as PSI if it is mainly for your knowledge, skills and expertise, such as designing software, consulting, or doing professional work. It does not matter whether you earn it as a sole trader or through a company, partnership or trust.

Income that is mainly for selling goods, or for the use of an asset such as equipment, is not PSI. The ATO lists the types of income that are not PSI on the same page.

What are the PSI rules and do they apply to my Pty Ltd?

The PSI rules apply to your PSI unless your business passes the tests for being a personal services business (PSB). If you can self-assess as a PSB, the PSI rules do not apply to your PSI for that income year.

You self-assess as a PSB in one of two ways:

1. The results test: you meet it for at least 75% of your PSI, or
2. One of the other tests plus the 80% rule: you meet the unrelated clients test, the employment test or the business premises test, and less than 80% of your PSI comes from the same client and its associates.

If you cannot self-assess as a PSB and you have no PSB determination, the PSI rules apply.

If your company has more than one individual earning PSI, the tests are applied to each individual. One person in a company can pass while another fails.

What is the results test?

The results test is the one most contractors fail, and the one a fixed-price business can pass. To pass, you must meet all three conditions for at least 75% of your PSI:

Source: ATO, results test.

Some practical points from the ATO's guidance:

• Hourly or daily rates generally fail the first condition. The ATO says that if you are paid on an hourly or daily rate, it is unlikely you meet it.
• Progress payments can still count. Payment after contractual conditions are met, including progress payments and deposits, can be payment for a result.
• Fixing mistakes must be genuinely at your cost. The ATO says you will not meet the condition if you invoice the client for the time spent fixing defects, or if you fix mistakes during your usual working times under the contract.
• The contract has to be enforceable. A term saying you fix mistakes at your cost only counts if the client could enforce it.

The ATO's example of a pass is an air-conditioning installer on a fixed contract price who brings his own tools and fixes defects at his own cost. The example of a fail is a consultant paid an hourly rate, working up to eight hours a day in the client's office with the client's computer.

What is the 80% rule?

The 80% rule applies if you rely on one of the three other tests. If 80% or more of your PSI comes from one client and their associates, you do not meet the rule and the PSI rules apply. If less than 80% comes from one source, you meet the rule and can then rely on another test.

Things that trip contractors up:

• Associates are grouped together. A client's relatives, a company the client controls, and a subsidiary of the client count as one source. The ATO's example: an IT consultant with two clients, one a company (charged $70,000) and the other a company owned by the first (charged $30,000), has 100% from one source.
• Agencies count as one client. For labour hire, the intermediary is the source. If you get work through a single agency, even for many end clients, you do not meet the 80% rule.
• Only PSI counts. Investment income and income from selling goods or using an asset is left out of the calculation.
• It is tested per individual if your company has more than one person earning PSI.

The results test does not need the 80% rule.

What is the unrelated clients test?

You pass if, in the income year, you received PSI from two or more unrelated clients, and there is a direct connection between an offer to the public and you being engaged to do the work. Source: ATO, unrelated clients test.

The ATO counts these as offers to the public: advertising, a website, posting internet advertisements, applying for competitive public tenders, and advertising in a journal or business directory. The ATO says word-of-mouth referrals will not satisfy the condition, except in very specialised or niche industries with few potential clients. Work obtained through labour hire firms or by answering ads on recruitment sites does not meet it either.

What is the employment test?

You pass if your business employs or contracts others to help perform the work that generates your PSI, and either at least 20% of the principal work is done by others, or you employ one or more apprentices for at least six months of the income year. Source: ATO, employment test.

Principal work is the work you are paid for under the contract. It does not include support work such as admin or bookkeeping. The ATO's example: a builder who pays his wife to run contract administration does not meet the test, because the admin is not principal work. You also cannot count your own work as an employee of your business, or work done by associated entities.

What is the business premises test?

You pass if, at all times in the income year, you maintained and used business premises that are:

• used mainly (more than 50%) to produce PSI
• used exclusively by you
• physically separate from your private premises
• physically separate from your clients' premises

Source: ATO, business premises test. Exclusive use means you own or lease the premises, and jointly leasing with another business does not count. Working from a spare room at home does not meet the test. Working in your client's office does not either.

What happens if the PSI rules apply to my Pty Ltd?

Three things change.

1. The income is attributed to you personally. If your business is a company and the PSI rules apply, you treat the PSI as belonging to the individual who produced it. The ATO's steps: identify the PSI, subtract any salary or wages promptly paid to the individual (paid by the 14th day after the relevant PAYG payment period), subtract the allowable deductions, and attribute what remains. The individual declares that amount in their own tax return. The company does not include it as assessable income, so there is no double taxation.

2. Some deductions are not allowed against PSI. You cannot claim rent, mortgage interest, rates and land tax for a residence, where those relate to your PSI. You also cannot deduct payments to associates (such as a spouse) for non-principal work, like bookkeeping or admin, or super contributions for that work. In general, you are treated as though you were in the same position as an employee.

3. A net PSI loss goes to you. If, after all steps, the PSI result is a loss, it is transferred to the individual. The business cannot use it against other business income or carry it forward.

The ATO also says that if you receive PSI you may have additional PAYG withholding obligations. That is another reason to take advice if you fail the tests.

In effect, the rules stop a company standing between you and income that is really for your own work. To see how company tax rates apply to the rest of your company's income, read company tax in Australia: 25% vs 30%.

Can I get a PSB determination if I fail the tests?

Sometimes. If you cannot self-assess as a PSB, you can apply to the ATO for a PSB determination in some circumstances. The ATO describes it as available only in limited cases, such as where unusual circumstances prevented you passing one of the tests. Industry-wide events, such as a downturn in your industry, cannot be relied on as unusual circumstances. Source: ATO, applying for a PSB determination.

Does this affect sole traders as well?

Yes, the same tests apply. The difference is that a sole trader does not need to attribute the PSI, because the income is already in their individual return. Source: ATO, how to attribute PSI. If you are deciding between structures, read Pty Ltd vs sole trader in Australia.

What records should I keep?

Keep records of your transactions and expense claims. The ATO says to keep them for five years after they are prepared, obtained or completed, whichever is later, and to show whether each expense relates to PSI or other income. Keep your contracts too, because the contract terms are the evidence for the results test: how you are paid, who supplies the tools and who pays to fix errors.

A worked example

Priya is a data engineer with a Pty Ltd. She bills one financial services client a day rate of $900 for 220 days. She works in the client's office, uses the client's laptop, and invoices for her time when she fixes a bug.

The PSI rules apply to Priya's company. Her net PSI is attributed to her personally, and she cannot deduct a home-office rent or mortgage interest against it.

If she re-papered the work as a fixed-price project, paid on delivery, with her own laptop, and with a contract term that she fixes defects at her own cost, she could pass the results test for that work. Whether a contract really works that way matters more than what it is called.

Where AccountsOS fits

Finn tracks your income by client so you can see how much of your PSI comes from one source against the 80% line, and keeps your contracts and invoices together as evidence. The test still depends on your facts, so a registered tax agent should confirm which side you are on.

Frequently Asked Questions

What is personal services income (PSI)?

Income produced mainly (more than 50%) from your skills or efforts as an individual, such as consulting, professional work or software development.

Do the PSI rules apply to my Pty Ltd?

They apply unless your business self-assesses as a personal services business: pass the results test for at least 75% of your PSI, or pass one of the other three tests and the 80% rule.

What is the 80% rule?

If 80% or more of your PSI comes from one client and its associates, you fail the rule and the PSI rules apply. It does not apply to the results test.

What is the results test?

You pass if, for at least 75% of your PSI, you are paid to produce a specific result, you supply any equipment needed, and you fix mistakes at your own cost.

Does being paid hourly or daily mean I fail?

Generally yes for the results test, because the ATO says an hourly or daily rate is unlikely to meet the condition of being paid for a specific result. You may still pass through another test, if you also meet the 80% rule.

What happens if I fail the PSI tests?

Your net PSI is attributed to you personally and taxed in your return. You also lose deductions for residential rent, mortgage interest, rates and land tax and for payments to associates for non-principal work.

Can my spouse do my admin and be paid for it?

If the PSI rules apply, you cannot deduct payments to an associate for non-principal work such as bookkeeping and admin. If you pass a PSB test, the PSI rules do not apply.

Do sole traders have to follow the PSI rules?

Yes. The tests are the same, but a sole trader does not need to attribute PSI because the income is already in their own return.

Sources

• ATO: Personal services income
• ATO: Self-assessing as a PSB
• ATO: Results test
• ATO: What to do when the PSI rules apply

This guide is general information, not tax advice. The ATO pages referred to were last updated between November 2022 and May 2023, so check the current ATO guidance or a registered tax agent for your income year.