Personal services income (PSI)
If you're a business involved in contracting or consulting and earn personal service income (PSI), special tax rules (the PSI rules) may affect which amounts you include in your assessable income and may limit the deductions you can claim.
These rules aim to ensure that those who provide individual personal services are assessed on the income they personally earn, and are not able to claim higher deductions than employees providing similar services.
You need to understand how PSI rules affect what you declare and what you can claim if:
- you earn PSI, and
- the PSI rules apply to you.
Not everyone with an Australian business number (ABN) is a genuine contractor or consultant. To check if your working arrangements are actually that of an employee/employer, use our Employee/contractor decision tool.
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What is PSI?
PSI is income that is mainly a reward for, or the result of, your personal efforts or skills. Examples include income you earn:
- as a consultant by providing your personal expertise
- as a professional practitioner in a sole practice
- under a contract that is wholly or principally for your labour or services
- as a professional sportsperson or entertainer by providing your professional skills.
PSI does not include income you earn mainly:
- by supplying or selling goods
- by granting a right to use property
- using an income-producing asset, such as a truck, to derive income
- through a business structure, such as a large accounting firm, as opposed to a sole trader contracted exclusively to a large firm.
If the PSI rules apply
If you earn PSI (whether you operate your business as a sole trader, partnership, company or trust), you need to work through a series of tests to see whether the PSI rules apply to your income and deductions.
If you’re a sole trader, the PSI rules limit the deductions you can claim, for example, on:
- car expenses for a spouse
- rent, mortgage interest, rates or land tax on your residence
- wages or super payments for associates.
Company, partnership or trust
If you operate your business as a company, partnership or trust:
- there are limits on the deductions you can claim
- we treat the income (less certain reductions) as your personal income and you must include it in your personal assessable income
- your business has an additional pay as you go (PAYG) withholding obligation on the income we treat as your personal income.
Alternatively, you may wish to contact your tax adviser.
If you are a business involved in contracting or consulting and earn personal services income (PSI), special tax rules may affect which amounts you include in your assessable income and may limit the deductions you can claim.