Personal services income (PSI) is income earned mainly from your own skills and effort. Work through it in order: pass the results test and you are done, whatever your client mix. Fail it, and you can only use the other three Division 87 tests if less than 80% of your PSI comes from one client and its associates. Fail everything, and Divisions 85 and 86 of the ITAA 1997 attribute the income back to you and restrict deductions.
Most subcontractors who ask us about PSI have already been told the wrong thing: that the rules are about how much you earn, or that a company fixes them. Neither is true. PSI is decided by where the income comes from, and the order in which you test it decides the answer.
Being classified as PSI does not automatically mean the adverse rules bite. The real question is whether you are running a personal services business (PSB). There are four tests, but they are not four equal doors. One stands on its own. The other three are locked behind a client-concentration gate that catches a large share of the trades, because so much subcontract work comes from a single builder.
This guide sets out that sequence, works through the employment test calculation that trips people up most often, and covers what changed when the ATO issued PCG 2025/5 on 28 November 2025. Passing a PSB test is no longer the end of the analysis.
Source: ABS, Working Arrangements, August 2025 (released 12 December 2025). Construction sits well above the 7.6% all-industries average, which is why PSI questions are so common in the trades.
Personal services income is income earned mainly as a reward for your personal skills, effort or expertise, rather than from selling goods, using assets or operating a business structure. It is defined in section 84-5 of the ITAA 1997 and generally arises where more than half of a contract's value comes from your own labour.
The PSI regime sits across four divisions of the Income Tax Assessment Act 1997: Division 84 defines PSI, Division 85 limits deductions, Division 86 attributes income, and Division 87 sets out the personal services business tests. The Commissioner's current view is in Taxation Ruling TR 2022/3.
A practical example helps. A bricklayer working for a residential builder, paid for their labour, earns PSI. A project manager who employs a team of bricklayers, carries professional indemnity insurance and accepts liability for project outcomes is generating income from a business structure, not solely from personal effort. The first is squarely within the PSI regime. The second may sit outside it entirely.
One clarification that saves a lot of confusion: PSI is tested contract by contract, not on your total income. A tiler can have one job that is PSI (labour only) and another that is not (supply and install, where materials carry most of the value). The amount you earn is irrelevant. There is no income threshold in Division 84.
In our experience advising Melbourne subcontractors, PSI most often arises in construction trades, consulting, IT contracting and contract labour. ABS figures for August 2025 put independent contractors at 1.1 million, or 7.6% of all employed people, with 280,600 in construction alone. If you operate in the trades, PSI is a question you should expect to face. For sector-specific support, see our accounting for builders and tradies.
Test it in order. First, is the income PSI? Second, do you pass the results test? If yes, you are a personal services business and the rules do not apply. If no, you can only use the unrelated clients, employment or business premises test where less than 80% of your PSI comes from one client and its associates.
The order matters more than the tests themselves. The results test stands alone: pass it and your client concentration is irrelevant. The other three sit behind the 80% rule. Work the sequence in this order:
Two points the ATO is explicit about in its guidance on self-assessing as a PSB. You run this sequence fresh every income year: passing last year proves nothing about this year. And where a company, trust or partnership has more than one person generating PSI, you run it separately for each individual.
| Test | What it measures | 80% rule? |
|---|---|---|
| Results s 87-18 |
For at least 75% of your PSI: paid for a result, supply your own tools, liable to fix defects at your own cost | No |
| Unrelated clients s 87-20 |
PSI from two or more unrelated clients, won as a direct result of offers to the public | Yes |
| Employment s 87-25 |
Others perform at least 20% of your principal work by market value, or you have one or more apprentices for at least half the income year | Yes |
| Business premises s 87-30 |
Premises used mainly for the work, exclusively yours, physically separate from your home and from any client's premises | Yes |
If you are weighing your engagement status more broadly, our note on the contractor versus employee distinction is a useful companion, because a worker who is actually an employee never reaches the PSI question.
The 80% rule asks whether less than 80% of your PSI in an income year comes from one client and that client's associates. Meet it and you can self-assess under the unrelated clients, employment or business premises test. Fail it and only the results test, or a PSB determination from the Commissioner, is available to you.
This is often called the 80/20 rule, which is a misleading name. It is not a safe harbour and it is not a test you pass. It is a gate. Clearing it does not make you a PSB; it only unlocks three of the four tests.
For subcontractors this is the single most common failure point. A carpenter who works all year on one builder's sites has 100% of their PSI from one client. Three of the four doors are shut before the analysis begins. The results test becomes the only realistic route, which is why contract terms matter so much (covered below).
Note that associates are grouped with the client. Two related companies in the same builder group count as one client for this purpose, so spreading invoices across entities in a single group does not help. Work through the calculation carefully as part of a tax planning review rather than at lodgement, because by then the year is set.
You pass the employment test under section 87-25 if, during the income year, entities other than you or your individual associates perform at least 20% of your principal work measured by market value, or you have one or more apprentices for at least half the income year. You must also meet the 80% rule.
This is the test we see argued most often and calculated correctly least often. Search data bears that out: the employment test draws thousands of Australian searches a month, and almost all of them are people trying to work out what counts. Three things decide it.
Principal work is the work you are contractually obliged to perform and paid for: the work central to meeting your obligations under the contract. For a plasterer it is plastering and rendering on site. The ATO's employment test guidance is clear that support work does not count. Quoting, invoicing, bookkeeping, answering the phone and scheduling are all excluded, however many hours they take.
The ATO's own example is a builder paying his wife for contract administration. That work is not principal work, so it does nothing for the test. This is the mistake we correct most often: paying a family member for the office work and assuming it counts toward the 20%.
You count work performed by entities you engage, whether as employees or subcontractors. You cannot count your own labour, work done by your individual associates, or work done by another individual who is generating their own PSI under a separate contract with the client. Government-supplied apprentices count for the apprentice limb; research assistants do not.
The measure is market value, not hours and not headcount. You compare the market value of the principal work performed by others against the market value of the principal work for the year. Where the contract is for principal work only, the contract price is the normal starting point. And you calculate it for each income year separately: where a job spans two years, only the value derived in the year being tested counts.
A plasterer operates through a company. For the 2026 income year the company invoices $240,000 of plastering work: $150,000 to Builder A and $90,000 to Builder B, which are unrelated. He engages two contract plasterers who are not his associates. He also pays his spouse $18,000 to run quoting, invoicing and site scheduling.
| Step | Amount |
|---|---|
| Total principal work for the year | $240,000 |
| Largest client (Builder A) share: 62.5%, so less than 80% | 80% rule met |
| Market value of principal work performed by the two contract plasterers | $54,000 |
| Spouse's contract administration: not principal work | $0 counted |
| $54,000 รท $240,000 | 22.5%, test passed |
Change one input and the answer flips. If the two plasterers had done $40,000 of the work, the ratio is 16.7% and the test fails. If the spouse's $18,000 were wrongly included, the calculation looks like $72,000 on $240,000, or 30%, and the position on the return is wrong. And if all $240,000 had come from Builder A, the 80% rule would have closed this test regardless of who performed the work.
One practical consequence for the trades: the apprentice limb is often the easier route. If you carry one or more apprentices for at least half the income year, the 20% calculation does not need to be run at all. The ATO describes this as at least 6 months, whether continuous or made up of separate periods in the year. Keep the training contract, timesheets and payroll records to support it. Employing an apprentice brings its own payroll and super obligations, which we cover in our tax compliance work, and the deductions that come with tools and equipment are set out in our guide to tradie tax deductions.
To pass the results test, at least 75% of your PSI must satisfy three conditions: you are paid to produce a specific result, you supply the tools and equipment needed to do the work, and you are liable to rectify defects at your own cost. Hourly, labour-only work usually fails. No 80% rule applies.
The results test is the pathway most subcontractors rely on, because passing it removes the client-concentration problem entirely. It rests on three linked elements, and it is decided largely by what your contract actually says.
You are entitled to payment only once the contracted conditions are fulfilled, typically on completion or delivery of an agreed output. A subcontractor paid $5,000 to build a brick wall to specification is paid for a result. An electrician paid $80 an hour is paid for time, which points towards employment. Progress payments and deposits are acceptable; rolling retainers and vague scopes are not.
You provide the plant, tools or equipment needed for the work, including anything the client would reasonably expect you to bring. A plasterer who owns their trowels, stilts and scaffolding satisfies this. A worker handed all tools by the client does not. Where the work genuinely needs no tools, the condition is treated as met. If you are buying equipment, our note on the instant asset write-off for tradies may help with timing.
You bear the cost of rectifying defective work. You do not have to do the remedial work yourself, but you must carry the cost. This is where paperwork undoes people: if you invoice the client for the time spent fixing a defect, or you rectify it during hours the client is already paying for, the client is effectively paying and the condition fails.
Make it explicit. A clause such as "the subcontractor warrants all work for 12 months and bears the cost of rectifying defects discovered in that period" is the kind of term that supports the position. Our view is that this is the highest-value hour a PSI-exposed subcontractor can spend: get the contract right at the front end, because you cannot retrofit it at lodgement.
Both are available only if you meet the 80% rule. The unrelated clients test needs PSI from two or more unrelated clients obtained as a direct result of offers to the public. The business premises test needs premises used mainly for the work, exclusively yours, and physically separate from both your home and any client's premises.
Having several clients is not enough. There must be a direct connection between a public offer and the engagement. The ATO's unrelated clients test guidance states that work obtained through labour hire firms or similar intermediaries, or by responding to advertisements on web-based recruitment sites, does not meet the condition. Word-of-mouth referrals generally do not either, unless the industry is so specialised that there are only a very small number of potential clients.
That closes this test for a large share of subcontractors, because most work comes through builders, agencies or referrals rather than advertising. Advertising, a genuine website, industry journal listings and competitive public tenders do count. Repeat work from an existing client still needs to trace back to your offers to the public in that year.
A home office fails. A desk at the client's site fails. A shed at the back of your own property fails, because it is not physically separate from your residence. A leased yard or workshop used mainly for the business, held exclusively by you and with its own access, is the kind of arrangement that qualifies. The ATO also requires the premises to be maintained and used throughout the income year, not just for part of it. For consultants and contract professionals the analysis runs the same way, and we cover it from that angle in our work with professional services firms.
If the PSI rules apply, income earned through a company, trust or partnership is attributed back to you and taxed at your marginal rate under Division 86. Specific deductions are denied under Division 85, including rent, mortgage interest, rates and land tax on your home, and most payments to associates. PSI cannot be split with family members.
Division 86 prevents you from diverting PSI through an entity to access lower rates or split income. PSI earned through a company, trust or partnership is treated as your income and taxed at your marginal rate, with offsets to avoid double taxation. A discretionary trust does not help: PSI must flow to the individual who did the work, not be spread across beneficiaries or retained at concessional rates.
Division 85 does not strip every deduction. Ordinary business expenses stay deductible where they are otherwise allowable. The specific denials are:
The exceptions in sections 85-30 and 85-35 switch Division 85 off where you are conducting a personal services business, or where you are an employee or office holder. The ATO sets out the practical detail on its page covering deductions when receiving PSI. Confirm each claim against current guidance before lodging.
Our CPAs work with subcontractors and tradies across Melbourne on PSI classification, contract terms, structuring and Division 7A. Let us review where you stand before the year closes.
Contact Us TodayWhere income is PSI, structure choice is about liability and administration rather than tax rate. A sole trader is simplest. A company adds liability protection, but the PSI is still taxed to you at your marginal rate. A trust cannot split PSI. No structure converts PSI into company-rate income.
The simplest option. You report income and claim deductions on your personal return, with no company tax and no Division 7A exposure. The trade-off is that you have no liability protection, so your personal assets are exposed if a client sues. Many higher-risk trades move to a company for that reason. Our sole trader structure guide covers the detail.
A company still works with PSI, mainly for liability protection: a claim is against the company, not your personal assets. The PSI itself is attributed to you under Division 86 and taxed at your marginal rate, so the usual company tax deferral is lost. Division 7A is a separate risk: payments or loans from the company to you that are not compliant dividends or proper loans can be deemed unfranked dividends. Drawings and loan accounts need active management. See our company structure overview.
A trust offers distribution flexibility for non-PSI income and some asset protection, but it cannot split PSI: that must go to the individual who performed the work. It is also more complex and costly to run. Trusts suit family businesses holding assets or earning mixed income, less so a pure PSI earner. Our explainer on how trusts work in Australia sets out the mechanics, and share classes versus a discretionary trust compares the two for genuine business profits.
Where a business genuinely moves beyond selling one person's time, by employing tradespeople, investing in plant, hiring out equipment or delivering training, the income from those activities is not PSI at all. Company income that is not PSI is taxed at the company rate, 25% for a base rate entity in the 2025-26 income year and 30% otherwise. That is a real difference, and it is why growing past a one-person operation matters commercially as well as for tax.
Our view is that this should be treated as a business development question, not a tax structure one. Building a second income stream purely to change the tax outcome, with no substance behind it, is the pattern the ATO is now looking at directly. That is the subject of the next section, and it is where we push back on a lot of the structuring advice circulating in the trades. We work through these trade-offs in our CPA advisory and small business accounting services.
No. Passing a personal services business test switches off Divisions 85 and 86, but it does not switch off the general anti-avoidance rule in Part IVA of the ITAA 1936. In PCG 2025/5, issued 28 November 2025, the ATO set out when it will review arrangements where a PSB splits or retains personal services income to reduce overall tax.
This is the most important recent development in this area, and it changes the standard advice. For years the working assumption was that once you cleared a PSB test, distributing or retaining income inside the entity was simply available. PCG 2025/5 makes clear the ATO does not accept that, and it applies to arrangements both before and after its issue date.
| Lower risk | Higher risk |
|---|---|
| The individual who performed the services is assessed on all the net PSI at their marginal rate | PSI distributed to associates taxed at lower rates |
| Remuneration is substantially commensurate with the value of the individual's personal services | PSI retained in the entity so the overall tax on it is reduced |
| Any retained profits serve a genuine commercial purpose, such as working capital or equipment | Retention with no identifiable commercial purpose, and material amounts diverted |
The guideline also gives taxpayers a runway. Where there is a genuine attempt to move an arrangement into the low-risk category by 30 June 2027, the ATO says it is less likely to apply compliance resources to it. The ATO has separately flagged PSI as a current compliance focus.
Where this leaves subcontractors: passing the results test or the employment test is still worth doing, because it protects your deductions and avoids attribution. It is not a licence to split the income afterwards. If an arrangement in place today involves paying PSI to a lower-taxed family member, or parking it in a company for the rate difference, it should be reviewed against the guideline well before 30 June 2027. The PSI rules also reach medical and allied health contractors, where the same analysis applies alongside payroll tax; see our note on PSI basics for doctors and our work with doctors, dentists and health practices.
PSI classification does not decide super. If you work under a contract wholly or principally for your labour, the payer may owe super guarantee at 12% under the extended employee definition. Where the PSI rules apply and the income is earned through a company, trust or partnership, that entity has additional PAYG withholding obligations on the attributed amount.
Even if your income is PSI, a payer may still owe super guarantee. Under section 12(3) of the Superannuation Guarantee (Administration) Act 1992, a worker engaged under a contract wholly or principally for their labour is treated as an employee for super purposes, regardless of holding an ABN. Since 1 July 2022 the former $450 monthly earnings threshold has been removed, so there is no minimum earnings floor. The super guarantee rate is 12% from 1 July 2025.
If you contract through a company, trust or partnership rather than personally, super guarantee does not apply to the entity. Where you operate your own company and pay yourself wages, or employ others, you must pay super on those wages. As a PSI earner without an employer paying for you, you build your own super. From 1 July 2026 the concessional contributions cap is $32,500 (up from $30,000 in 2025-26) and the non-concessional cap is $130,000 (up from $120,000), subject to your total super balance. Verify the caps against the ATO key superannuation rates and thresholds before relying on them, and see the ATO's guidance on super for independent contractors.
This is widely misunderstood, so it is worth being precise. If you receive PSI directly as a sole trader and the rules apply, you have no PAYG withholding obligation on your own income; you pay tax through PAYG instalments and have withholding obligations only for any staff you employ.
Where the PSI is received by a company, trust or partnership, the position is different. That entity has additional PAYG withholding obligations on PSI that is not promptly paid to you as salary or wages, meaning within 14 days of the end of the relevant PAYG withholding period. It must be registered for PAYG withholding, withhold from the attributed amount, report and pay through the activity statement, and issue a payment summary by 14 July that distinguishes salary from attributed PSI. A partnership cannot pay wages to a partner at all, so it only ever has the additional obligation.
The ATO allows three calculation methods, the simplest being 70% of the gross PSI received. Used correctly, the simplified methods protect you from penalties on a year-end shortfall. If a client or labour-hire provider withholds tax from your payments in error, you claim the credit on lodgement. Keeping these obligations in order is part of our BAS and IAS work, and builders paying subcontractors should also check their TPAR reporting obligations.
The policy is simple. Income earned mainly from your own effort should be taxed as yours, whatever entity you invoice through. You should not access lower rates by changing the legal wrapper when the economic reality is that you are selling your labour.
The four tests exist because many people who sell personal services are running genuine businesses. If you have moved beyond selling your time, by employing staff, investing capital, winning multiple clients or holding real business premises, you are taxed as a normal business. The stakes are not trivial: for a subcontractor, the difference between PSI and non-PSI treatment, and the deductions that ride on it, can run to thousands of dollars a year. Getting advice before you structure is far cheaper than unwinding a position later.
We will work through your contracts, your client mix and your structure, and set out the PSI position for the current year in writing. The initial meeting is free.
Schedule a meetingAuthor and technical reviewer: Sergiy Kucherenko CPA, Director of 42 Advisory, a CPA firm and registered tax agent (TPB registration 26303651). Checked against ATO guidance, TR 2022/3, PCG 2025/5 and the ITAA 1997 as at 22 September 2026. Rates, caps and thresholds change annually; confirm the figures for your income year before acting.
Disclaimer: The information provided in this article is general in nature and does not constitute specific tax, legal, or financial advice. We recommend seeking professional advice tailored to your individual circumstances. 42 Advisory is a CPA firm and Registered Tax Agent.
The 80% rule asks whether less than 80% of your PSI for the income year comes from one client and that client's associates. If it does, you can self-assess as a personal services business under the unrelated clients, employment or business premises test. If 80% or more comes from one client group, those three tests are unavailable and you must either satisfy the results test or apply to the Commissioner for a personal services business determination.
Under section 87-25, entities other than you and your individual associates must perform at least 20% of your principal work by market value during the income year, or you must have one or more apprentices for at least half the income year. Principal work is the core contracted work, so administration, bookkeeping and scheduling do not count. You must also meet the 80% rule, and the calculation is done fresh each income year.
Generally no, on two counts. Work performed by your individual associates is excluded from the 20% calculation, and administrative work such as quoting, invoicing or bookkeeping is not principal work regardless of who performs it. The ATO's own example is a builder paying his wife for contract administration, which does not satisfy the test. Section 85-20 separately denies a deduction for paying an associate for non-principal work.
The results test is the one Division 87 test not subject to the 80% rule. For at least 75% of your PSI you must be paid to produce a specific result, supply the tools and equipment needed for the work, and be liable to rectify defects at your own cost. Passing it means you are a personal services business regardless of how concentrated your client base is, which is why it is the main route for subcontractors working for a single builder.
Division 85 denies deductions for rent, mortgage interest, rates and land tax on a residence used to earn PSI (s 85-15), payments to associates for work that is not principal work (s 85-20), and super contributions for associates in respect of that work (s 85-25). More broadly, you cannot deduct an amount an employee could not have deducted had they earned the income as salary (s 85-10). Ordinary business expenses remain deductible where otherwise allowable.
Being a personal services business is better, because Divisions 85 and 86 do not apply: deductions are not restricted and income is not attributed back to you. It is not a tax planning device, though. PSB status does not let you split or retain the personal services income, and PCG 2025/5, issued on 28 November 2025, sets out when the ATO will review such arrangements under Part IVA of the ITAA 1936.
PSI classification alone does not decide super guarantee. If you work under a contract wholly or principally for your labour, the payer may owe super at 12% under the extended employee definition in the Superannuation Guarantee (Administration) Act 1992. Where it does not apply, you fund your own super. From 1 July 2026 the concessional cap is $32,500 and the non-concessional cap is $130,000, compared with $30,000 and $120,000 in 2025-26. Verify both against current ATO thresholds.
You can apply for a personal services business determination under Subdivision 87-B of the ITAA 1997. Section 87-70 lets an individual or entity apply to the Commissioner in the approved form, and section 87-60 sets out when a determination can be made. If the Commissioner has not decided within 60 days, you may give written notice to treat the application as refused. Alternatively you can self-assess against the four tests. Seek advice before taking either path.