Most contractors know the phrase personal services income. Fewer know how to actually work through the tests, document the answer and report it correctly in their tax return. That gap is where ATO reviews start.
This is a practical compliance guide for the 2025-26 returns now being lodged and the 2026-27 year. It covers each personal services business test, the 80% rule, determinations, deductions, attribution and reporting. Everything was checked against the ATO’s PSI guidance and Taxation Ruling TR 2022/3 on 7 October 2026.
It is for sole traders, consultants and contractors working through companies or trusts. If you are new to PSI and want the concepts first, start with our introduction to personal services income for SMEs, then come back here for the checklist.
Key takeaways
- Income is PSI if it is more than 50% a reward for your personal efforts or skills.
- The results test needs all three conditions met for at least 75% of your PSI.
- If 80% or more of your PSI comes from one client and their associates, the other three tests are off the table.
- Companies and trusts must attribute net PSI to the individual. Salary counts if paid by the 14th day after the PAYG payment period.
- You must report PSI in your return even if you are a personal services business.
PSI tests at a glance
| Test | What you need to show | Affected by 80% rule? |
|---|---|---|
| Results test | For at least 75% of PSI: paid for a result, you supply the tools and equipment, and you are liable to fix defects | No |
| Unrelated clients test | PSI from 2 or more unrelated clients, engaged as a direct result of offers to the public | Yes |
| Employment test | Others do at least 20% of the principal work by market value, or you employ an apprentice for at least 6 months | Yes |
| Business premises test | Premises used mainly for PSI, exclusively by you, separate from your home and clients, at all times in the year | Yes |
| PSB determination | ATO confirms the rules do not apply, usually where unusual circumstances stopped you passing | Can address it |
Source: ATO working out if the PSI rules apply, ATO PSB determination application, TR 2022/3, checked 7 October 2026.
Is your income personal services income?
Under TR 2022/3, which replaced TR 2001/7 and TR 2001/8, income is PSI if it is mainly a reward for an individual’s personal efforts or skills. Mainly means more than 50%. Look at each contract separately.
An IT consultant paid a daily rate, an engineer on a project contract or a locum doctor will usually earn PSI. Income mainly from selling goods, using significant assets or a business structure with staff usually is not. If the income is not PSI, the rules do not apply and you can stop here.
How do you work through the PSB tests?
Step 1: the results test
Start with the results test. For at least 75% of your PSI, you must be paid to produce a result, supply the plant, equipment or tools needed, and be liable for the cost of fixing defects. Pass it and you are a personal services business for the year. Daily or hourly rate contracts rarely pass.
Step 2: the 80% rule
If you fail the results test, check where your PSI came from. If 80% or more came from one client and their associates, you cannot self-assess using the other tests. The ATO notes that if you get work through one agency only, you will not meet the 80% rule.
Step 3: the other three tests
If less than 80% came from one source, you need to pass just one of these:
- Unrelated clients test: PSI from 2 or more unrelated clients, with a direct connection between an offer to the public (such as advertising, a website or a public tender) and being engaged
- Employment test: at least 20% of the principal work, by market value, is done by others you engage, or you employ one or more apprentices for at least 6 months
- Business premises test: premises used mainly to earn PSI, used exclusively by you, physically separate from your home and from clients’ premises, and held at all times during the year
Step 4: a PSB determination
If you are unsure, or unusual and temporary circumstances stopped you passing, you can apply for a personal services business determination. Include contracts and sample invoices. The ATO’s PSI tool is a good first check, and saving its report gives you a record of your reasoning.
What changes when the PSI rules apply?
The rules limit deductions to broadly what an employee could claim. The main differences:
| You can claim | You cannot claim |
|---|---|
| Costs of gaining work, such as advertising, tendering and quoting | Rent, mortgage interest, rates and land tax for your home |
| Professional indemnity and liability insurance | Payments to an associate for non-principal work, such as bookkeeping |
| Wages to an arm’s length employee or contractor | Super for an associate doing non-principal work |
| Super for yourself and arm’s length staff | – |
| Home office running costs, depreciation and tax agent fees | – |
For general claims as a contractor, see our guides to sole trader tax deductions and home office deductions. Employees should read our work-related deductions guide instead.
How does attribution work for companies and trusts?
If you work through a company, partnership or trust and the rules apply, the entity must attribute net PSI to the person who did the work. In broad terms, start with the PSI received, subtract salary paid to that person promptly, subtract allowable deductions, and the remainder is attributed. Promptly means by the 14th day after the PAYG payment period in which the PSI was received.
The individual includes the attributed amount in their own return and the entity reduces its assessable income. Moving from a sole trader to a company, as covered in our sole trader to company guide, does not avoid this.
Worked example: an IT contractor working through a company
Raj’s company earns $180,000 in 2025-26 from a 12-month daily-rate contract with one bank. He uses the bank’s equipment and is not liable for defects.
Results test: fails. 80% rule: 100% comes from one client, so the other tests cannot be used. The PSI rules apply.
Deductions: Raj’s salary $100,000 (paid promptly), his super $12,000, professional indemnity insurance $2,000 and accounting fees $3,000.
Not deductible: $15,000 paid to Raj’s spouse for bookkeeping, as it is non-principal work by an associate.
Attribution: $180,000 – $100,000 – $12,000 – $2,000 – $3,000 = $63,000 attributed to Raj. His assessable income from the work is $100,000 + $63,000 = $163,000.
Rule of thumb: Run the tests every year, contract by contract, and keep the evidence. A PSI position you cannot document is one you cannot defend.
How do you report PSI in your tax return?
The ATO says you must report PSI even if you are a personal services business and the rules do not apply. Sole traders complete the PSI section of their individual return. Companies complete item 14 and partnerships and trusts item 30, and if the rules apply they also complete the reconciliation labels. If your PAYG instalments are affected, review your activity statements using our activity statement guide.
Common PSI compliance mistakes
- Assuming you are a business: having an ABN or a company does not make you a personal services business.
- Skipping the 80% check: one dominant client rules out three of the four tests.
- Deducting payments to a spouse for admin: non-principal work by an associate is not deductible when the rules apply.
- Leaving PSI in the company: net PSI must be attributed to the individual for the year.
- Not reporting PSI: the PSI questions must be completed even when the rules do not apply.
FAQ about personal services income compliance
Do I have to report PSI if I pass a PSB test?
Yes. The ATO says you still report personal services income in your tax return even if you are a personal services business and the PSI rules do not apply. Sole traders report it in the PSI section of their individual return. Companies, partnerships and trusts complete the PSI item in their own return.
How does the 80% rule work?
If 80% or more of your PSI comes from one client and their associates, you cannot rely on the unrelated clients, employment or business premises tests to self-assess as a personal services business. You can still pass the results test, or apply to the ATO for a personal services business determination if unusual circumstances apply.
Can I pay my spouse to do my bookkeeping?
You can pay them, but if the PSI rules apply you cannot deduct payments to an associate for non-principal work such as bookkeeping or administration, or super contributions for that work. Payments to an associate who performs principal work are treated differently, so get advice before setting up the arrangement.
What is a personal services business determination?
It is a notice from the ATO confirming the PSI rules do not apply to you. You apply using the approved form with contracts and sample invoices. It may be granted if you are unsure whether you pass a test, or unusual, temporary circumstances stopped you from passing one. It lasts for the period stated in the notice.
Does working through a company avoid the PSI rules?
No. If the PSI rules apply, the company, partnership or trust must attribute the net PSI to the individual who did the work, so it is taxed at that person’s rates. Salary paid promptly and allowable deductions reduce the attributed amount. A structure change alone does not change whether income is PSI.
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Nanak Accountants can test your contracts against each PSB test, prepare a determination application where it fits and complete the PSI sections of your return. Call 1300 626 258, visit nanakaccountants.com.au or book a free 15-minute consultation.
This article is general information only and is not personal tax or legal advice. Figures and rules were checked against the ATO personal services income pages (tests, deductions, attribution and tax return reporting), the PSB determination application and TR 2022/3 on 7 October 2026. Rates and thresholds change, so confirm the current position before acting.
