What is PSI?

Personal Services Income (PSI) is income that’s mainly a reward for an individual’s personal efforts or skills. It usually applies to freelancers, consultants, and contractors who operate through a company, partnership, or trust but are really being paid for their own work.

In Australia, the ATO (Australian Taxation Office) uses PSI rules to make sure people don’t avoid tax by diverting income through a business structure when the income is really for their personal work.

Key points:

• PSI is earned when more than 50% of the income from a contract is for your labour, skills, or expertise.

• It can apply whether you’re a sole trader or working through a company, trust, or partnership.

• PSI rules limit deductions you can claim and may force income to be attributed directly to the individual who earned it.

Examples of PSI:

• A software developer contracted through a company but paid mainly for their coding work.

• A consultant or engineer billing clients through a trust, but doing all the work themselves.

There are tests (like the results test, unrelated clients test) to determine if you’re running a personal services business (PSB) and whether PSI rules apply. If you pass one of those tests, you may be exempt from PSI rules.