What is personal services income?

Published Thursday 23 July 2026

Table of contents

• What is personal services income (PSI)?
• How to tell if your income is PSI
• What income is not PSI
• Which jobs and professions commonly earn PSI
• Working out if the PSI rules apply
• What changes when the PSI rules apply
• PSI vs a personal services business (PSB)
• How to report PSI on your tax return
• Manage your PSI and tax obligations with Xero
• FAQs on personal services income

Key takeaways

• Personal services income (PSI) is income you earn mainly from your own skills, effort, or expertise, rather than from goods, assets, or a business structure.
• Income counts as PSI when more than 50% of the amount you receive under a contract is a reward for your labour, skills, or expertise.
• The PSI rules can limit the deductions you claim and stop you splitting income, so you need to check which of the tests apply to you.
• You self-assess your PSI each year, and the ATO PSI decision tool can help you work out whether the rules apply.

What is personal services income (PSI)?

Personal services income (PSI) is income you earn mainly from your personal skills, effort, or expertise. More than half the payment must be a reward for what you personally do, not for goods you sell or assets you supply.

You can earn PSI whether you work through a company, partnership, or trust, or as a sole trader operating in your own name. The ATO explains which income is PSI, and there is a plain-English overview of how PSI works on business.gov.au.

How to tell if your income is PSI

Your income is PSI when more than 50% of an amount you receive under a contract is for your labour, skills, or expertise. You apply this test to each separate contract or invoice, not to your total income for the year.

Say you invoice a client $6,000 to design and build a brand identity. If $4,000 of that is for your design work and $2,000 is for printed materials you supply, then more than 50% is a reward for your skills, so the payment is PSI. The ATO sets out this more-than-50% test in detail.

What income is not PSI

Not every payment you receive is PSI, even if your skills helped produce it. The ATO lists the types of income that are not PSI, and your income generally isn't PSI when it comes from:

• selling or supplying finished goods, even if you made them yourself
• an income-producing asset, such as machinery or a vehicle you hire out
• licensing your intellectual property or a trademark
• salary or wages you earn as an employee
• work that is mainly the result of a team or a business structure

Which jobs and professions commonly earn PSI

PSI can apply across many industries, and it often affects people who contract their skills to clients. You may earn PSI if you work as one of the following:

• IT consultants and software developers
• engineers and draftspeople
• financial advisers and accountants
• medical practitioners and locums
• construction and trade contractors
• freelance writers, designers, and consultants

Working out if the PSI rules apply

Earning PSI doesn't automatically mean the PSI rules apply to you. You work through a set of tests to decide, and the ATO guidance on working out if the PSI rules apply walks through each one. The 4 tests are:

• the results test
• the unrelated clients test, which includes the 80% rule
• the employment test
• the business premises test

The results test is the main test, and passing it means the PSI rules don't apply. To pass the results test, for at least 75% of your PSI you must:

• be paid to produce a specific result
• provide your own tools and equipment needed for the work
• be liable to fix any defects at your own cost

The 80% rule sits inside the unrelated clients test. If 80% or more of your PSI in a year comes from a single client and you don't pass the results test, the PSI rules apply to you.

If no single client gives you 80% or more, you can self-assess against the remaining tests. You pass the employment test if you pay employees or contractors to do at least 20% of the principal work by market value.

You pass the business premises test if you have premises that are separate from your home and your clients, used mainly for your PSI work and exclusively by you.

What changes when the PSI rules apply

When the PSI rules apply, they change how you're taxed and what you can claim, and the ATO explains what to do when the PSI rules apply. The income is attributed to you as the individual who did the work, so you can't split or divert it to a company, trust, or family member to lower your tax.

You also lose access to some deductions. When the PSI rules apply, you generally can't claim deductions for:

• rent, mortgage interest, rates, or land tax on your home
• payments to your spouse or family for support work like admin
• amounts you split with an associate

You can still claim many everyday business deductions. These usually include costs to:

• gain work, such as advertising and tendering
• run your business, such as registration, insurance, and some travel
• pay salary to an arm's length employee who does the work

PSI vs a personal services business (PSB)

A personal services business (PSB) still earns PSI, but it passes at least one of the 4 tests, or it holds a personal services business determination from the ATO. That status is what separates a PSB from income caught by the PSI rules.

If you're a PSB, the PSI rules don't restrict your deductions or income splitting in the same way. You still report the income you earn, but you're treated more like a standard business for tax purposes.

How to report PSI on your tax return

Reporting PSI is straightforward once you know whether the rules apply. Follow these steps to report it correctly at tax time.

1. Work out whether the income is PSI using the more-than-50% test on each contract.
2. Use the ATO PSI decision tool to check whether the PSI rules apply to you.
3. Keep clear records of your PSI, your deductions, and any test results, which is simpler when you use invoicing software for contractors.
4. Report your PSI in the personal services income section of your tax return, or in the business schedule if you lodge as a sole trader.
5. Claim only the deductions the PSI rules allow for your situation.

For a wider view of your obligations, the Xero guide to sole trader tax covers how PSI fits alongside your other reporting.

Manage your PSI and tax obligations with Xero

Staying on top of PSI is easier when your income and expenses sit in a single place. With Xero, you can send invoices, track payments, and categorise your deductions so your records are ready when you report.

Good habits during the year mean fewer surprises at tax time and more confidence that your PSI is reported correctly. Compare your options with the guide to choosing the best invoicing software, then keep your PSI records tidy and your tax obligations under control when you get one month free.

FAQs on personal services income

Here are answers to some frequently asked questions about personal services income to help you apply the rules with confidence.

What is the 80% rule for PSI?

The 80% rule means that if 80% or more of your PSI in a year comes from a single client and you don't pass the results test, the PSI rules apply to you. If no single client provides 80% or more, you can self-assess against the other tests instead.

Is it better to be classified as PSI or a PSB?

Being a PSB can be better because the PSI rules don't limit your deductions or income splitting in the same way. Which one applies depends on the tests you pass, not on which you'd prefer.

Do sole traders earn personal services income?

Yes, sole traders often earn PSI when more than half of their contract income is a reward for their personal skills or effort. The PSI rules can still apply to you even though you trade in your own name.

What deductions can you claim on PSI?

You can usually claim costs like gaining work, registration, insurance, and salary paid to an arm's length employee. You generally can't claim rent or interest on your home, or payments to family for support tasks.