Income is classified as PSI when more than 50% of the income you've received from a contract is a reward for your personal efforts or skills, rather than being generated by the use of assets, the sale of goods, or from a business structure.
When working out if your income is PSI, you need to look at the income you have received from each contract separately.
The terms and conditions of the contract, as well as invoices and written agreements that detail the work arrangement, are important in working out if the income is PSI. These can help you to work out what percentage of income from each contract was for:
- your labour, skills, knowledge, expertise or efforts, and
- anything else, such as the materials supplied or tools and equipment used.
If 50% or less of the income received from a contract was for your personal efforts or skills, then none of the income from that contract is PSI.
You can receive PSI in almost any industry, trade or profession. Common examples include but are not limited to:
- financial professionals
- information technology consultants
- construction workers
- medical practitioners.
As PSI is mainly a reward for an individual's personal efforts or skills, only individuals can earn PSI. Individuals can earn PSI either directly as a sole trader, or through another entity such as a company, partnership or trust. When an individual earns PSI indirectly through another entity, that entity is referred to as a 'personal services entity' (PSE).
Example 1: sole trader earning PSI
Andre is a plumber who operates as a sole trader. He receives a contract to fix a blocked toilet and repair 3 leaking taps. He charges $25 for materials and $225 for his labour. The total of the invoice is $250. This income ($250) is PSI as it is mainly a reward for Andre’s personal efforts and skills.End of example
Example 2: individual earning PSI through another entity
Sandy is an information technology consultant who provides systems analysis services through her company, SP Consulting. SP Consulting enters into a contract with Richie's Computer Co to provide Sandy’s consultancy services. The contract and invoice for this work both indicate that more than 50% of the payment for these consultancy services are a reward for Sandy's labour. Therefore, the income is mainly a reward for Sandy's personal efforts or skills and is PSI.End of example
For more information about PSI and its rules and obligations, see:
- Income that is not PSI
- What to do if the PSI rules apply
- What to do if the PSI rules don't apply
- Taxation Ruling TR 2022/3 Income tax: personal services income and personal services businesses