Personal services income (PSI) is defined by the Australian Taxation Office (ATO) as income that is mainly a reward for your personal efforts or skills.
It can be earned in almost any industry or job, and can affect the tax obligations and the deductions you can claim. It can also affect whether you are classified as a defacto employee of a business, even if you are an independent contractor, because you earn more than 80 per cent of your income from one source.
When do the PSI rules apply?
The PSI rules apply when 50 per cent of the income you receive for a contract was for your labour, skills or expertise. If more than half the income received for a contract was for your labour, skills or expertise, then all income from that contract is classified as PSI.
What types of professions earn PSI?
Some examples of jobs that are likely to attract PSI include:
- financial adviser
- information technology consultant
- construction worker
- medical practitioner
- makeup artist
PSI does not apply to employees receiving only salaries and wages. However, if you are an employee of your own entity, such as a company, partnership or trust, or a sole trader, the rules may still apply to you.
How to find out if you attract PSI
The ATO provides a series of questions on this fact sheet to help work out if the PSI rules apply to you, if you have received more than 50 per cent of your income for a contract from your personal skills, labour or expertise. The ATO has an online tool to help you determine whether the PSI rules apply. You can use the tool anonymously on the website, or if you log into their online services for individuals you can submit your results to the ATO for use in your tax return.
After answering a series of questions, the tool will provide you with a report with guidance on whether your income is PSI and if the rules apply to you. It will also summarise the responses you have provided and explain what your result means for your tax obligations.
For tax purposes, an individual who earns PSI is treated in the same way as an employee. This means, your business may claim deductions against PSI received if the expenses are incurred in producing the income and you (as an individual who earns the income) would be entitled to the deduction.
Who is exempt?
For exemption from PSI rules, you need to be a personal services business (PSB) with less than 80 per cent of your PSI coming from one client and you meet one of the following criteria:
- unrelated clients test
- employment test
- business premises test.
You can apply to the ATO for a determination confirming that you are a personal services business, through their online services for individuals.
Use the ATO’s personal services income tool to help understand whether the rules apply to you, or speak to your accountant or tax agent for advice.
Read our choosing an accountant information guide.