Personal services income (PSI) is income earned mainly from your own skills and effort. If your income is PSI and you fail all four personal services business tests in Division 87 of the ITAA 1997, the ATO can attribute company, trust or partnership income back to you and restrict some deductions. Most subcontractors escape the rules by passing the results test.
In the Australian tax system, how you earn income can matter as much as how much you earn. Personal services income is a category the ATO treats differently from ordinary business income, and it catches many subcontractors, tradies, consultants and contract professionals by surprise.
Being classified as PSI does not automatically mean the adverse rules bite. The real question is whether you are running a genuine personal services business. If you pass one of the four statutory tests, you are taxed as a normal business. If you fail all four, the attribution and deduction rules apply. This guide explains where the line sits and how subcontractors can stay on the right side of it.
Source: ABS, Working Arrangements, August 2025. Construction sits well above the 7.6% all-industries average, which is why PSI questions are so common in the trades.
What Is Personal Services Income?
Personal services income is income earned mainly as a reward for your personal skills, effort or expertise, rather than from selling goods, assets or 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 is built 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 starting point is always the same question: is more than 50% of the income a reward for your effort or skill?
A practical example helps. A bricklayer working directly for a residential builder, paid for their labour, earns PSI. By contrast, 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.
In our experience advising Melbourne subcontractors, PSI most often arises in construction trades, consulting, IT contracting and contract labour. ABS figures put independent contractors at 1.1 million, or 7.6% of all employed. Construction runs far higher, at around 21% of its workforce. 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.
How Do You Know If the PSI Rules Apply to You?
The PSI rules apply once your income is PSI and you fail all four personal services business tests in Division 87. Passing the results test alone lets you self-assess as a business. The other three tests can only be self-assessed if less than 80% of your PSI comes from one client and its associates.
The ATO recognises that not everyone who earns income from personal effort is running a personal services business. If you satisfy at least one of the four tests, the PSI restrictions do not apply. The results test stands alone: pass it and your client concentration is irrelevant. For the unrelated clients, employment and business premises tests, you must also meet the 80% rule before you can self-assess.
| Test | What it measures | Example |
|---|---|---|
| Results test | You are paid for a result, supply your own tools, and are liable to fix defects (no 80% rule applies) | A plumber paid per job who owns their equipment and guarantees workmanship |
| Unrelated clients test | You derive PSI from two or more unrelated clients won through a public offer, and meet the 80% rule | An electrician who advertises publicly and works for several separate customers |
| Employment test | Others perform at least 20% (by market value) of the principal work, or you employ an apprentice for at least 6 months. The 80% rule applies | A contractor whose subcontractors perform 20% or more of each job's core work |
| Business premises test | You maintain business premises separate from home and from any client's premises. The 80% rule applies | A consultant with a dedicated leased office for planning and administration |
If 80% or more of your PSI comes from one client and its associates, you cannot self-assess under the last three tests, and you would need to either pass the results test or apply to the ATO for a determination. The ATO's guidance on self-assessing as a PSB sets out how it applies each test. If you are weighing contractor status more broadly, our note on the contractor versus employee distinction is a useful companion.
What Happens If Your Income Is PSI?
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. Certain deductions are also restricted under Division 85. You cannot split PSI with family members to reduce the overall tax bill.
Attribution rules (Division 86)
Division 86 prevents you from diverting PSI through an entity simply 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 here: PSI must flow to the individual who did the work, not be spread across beneficiaries or retained at concessional rates.
Deduction restrictions (Division 85)
Division 85 does not strip every deduction. Ordinary business expenses remain deductible where they are otherwise allowable. The main restrictions to watch are:
- Payments to associates: payments to a spouse or family member for non-principal work are generally denied. A deduction is only available where the associate performs work that directly produces the PSI and the amount is reasonable.
- Certain travel: some travel-related deductions are limited. Each claim must be assessed against the specific exclusions in Division 85 rather than under a blanket rule.
- Home occupancy costs: rent, mortgage interest, rates and land tax for your residence are restricted where they relate to PSI. Claims are limited to expenses directly connected to earning the income.
The ATO sets out the detail on its deductions when receiving PSI page. Confirm each claim against current guidance before lodging.
How Can Subcontractors Pass the Results Test?
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 fix any defects at your own cost. Hourly, labour-only work usually fails the test.
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.
1. Paid for a result
You are paid a fixed or agreed price for a defined, verifiable outcome. 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. Rolling retainers and vague scopes make this element harder to argue.
2. Supply your own tools and equipment
You provide the plant, tools or equipment needed for the work. A plasterer who owns their trowels, stilts and scaffolding satisfies this element; a worker handed all tools by the client does not. The investment should be substantial and genuinely necessary for the job. If you are buying equipment, our note on the instant asset write-off for tradies may help with timing.
3. Liability for defects
You bear the cost of rectifying defective work, without extra payment. This mirrors the risk a business owner carries. Make it explicit in your contract. A clause such as "the subcontractor warrants all work for 12 months and bears the cost of rectifying defects discovered in that period" strengthens your position. A bricklayer engaged at a fixed price to build three walls, using their own tools and warranting the work, clearly passes.
What Are the Best Structuring Options for Subcontractors?
If your income is PSI, your structure choice is narrower but still matters. A sole trader is simplest. A company adds liability protection but the PSI is still taxed to you. A trust cannot split PSI. Pairing PSI with genuine non-PSI income streams is usually the most effective option.
Sole trader
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.
Private company
A company still works with PSI, mainly for liability protection: a claim is against the company, not your personal assets. The PSI itself, though, 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 careful management. See our company structure overview.
Discretionary trust
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.
The practical strategy
In our experience, the most effective structure for PSI earners is a company that combines PSI (your on-site labour) with genuine non-PSI income, such as hiring and managing other tradespeople, equipment hire, or training. The non-PSI component keeps the corporate tax rate, which offsets the higher personal rate on the PSI portion. If you earn only PSI and want liability cover, a company with careful Division 7A planning still adds value. If liability is not a concern, sole trader is simpler and more efficient. We work through these trade-offs in our tax planning and business tax services.
Have Questions About Your PSI Position?
Our CPAs work with subcontractors and tradies across Melbourne on PSI classification, structuring and Division 7A. Let's review where you stand.
Contact Us Today →Do the PSI Rules Affect Your Super and PAYG?
PSI classification does not decide super. If you work under a contract wholly or principally for your labour, the payer may owe super guarantee under the extended employee definition. Where it does not apply, you fund your own super through concessional contributions, deductible up to $30,000 in 2025-26.
Super guarantee
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.
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: concessional contributions are deductible up to $30,000 for 2025-26, and non-concessional contributions up to $120,000 (subject to your total super balance). Verify the caps against the ATO key super rates and thresholds before relying on them, and see the ATO's guidance on super for independent contractors.
PAYG withholding
If you operate as a sole trader or partner, you have no PAYG withholding obligation unless you employ staff, and you pay your own tax through PAYG instalments. Where PSI is earned through a company, the PAYG treatment of amounts paid to you depends on the legal character of the payment and needs to be assessed case by case. If a client or labour-hire provider withholds tax from your payments by mistake, you can claim the credit when you lodge. Keeping these obligations in order is part of our tax compliance support.
Why Do the PSI Rules Exist?
The PSI rules exist to stop income splitting and structuring that erodes the tax base. The policy is simple: income earned mainly from your own effort should be taxed as yours, whatever entity you invoice through. You should not be able to access lower marginal rates by changing the legal wrapper when the economic reality is that you are selling your labour.
At the same time, the four tests acknowledge that 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 a real business premises, you are taxed as a normal business. For consultants and contract professionals weighing this, our work with professional services firms covers the same ground from a non-trade angle. The PSI rules can also apply to medical contractors, which we cover in our note on PSI basics for doctors.
The stakes are real. For a subcontractor, the difference between PSI and non-PSI treatment can be thousands of dollars in tax each year. If you are unsure where you sit, getting advice before you structure is far cheaper than unwinding a problem later.
Key Takeaways for Subcontractors
- Income is PSI where more than half a contract's value comes from your own labour or skill (section 84-5).
- The rules only bite if you fail all four Division 87 tests. Passing the results test alone is enough.
- Fixed-price work, your own tools, and a defect warranty are the building blocks of the results test.
- PSI cannot be split through a trust or company; it is taxed to the person who did the work.
- Super guarantee can still apply to a labour-based contract even where income is PSI.
Book a PSI Strategy Review
Let 42 Advisory review your structure and PSI position, and map the most tax-effective way forward. The initial meeting is free.
Schedule a meeting →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.
Frequently Asked Questions
What is the 50% test for personal services income?
Income is PSI where it is mainly a reward for your personal effort or skill (section 84-5 of the ITAA 1997). In practice, if more than 50% of a contract's value comes from your labour, the income is likely PSI. This is only the first step. Being PSI does not mean the adverse rules apply: the next question is whether you qualify as a personal services business under Division 87.
Can a company still pay PSI to a sole trader?
Yes. If a company pays a contractor whose income is PSI, the PSI rules apply to that contractor. Payment coming from a company does not change the nature of the income. The contractor reports it as PSI on their personal return and applies Divisions 85, 86 and 87. The payer should also consider its PAYG obligations and, in the building and construction industry, whether a Taxable Payments Annual Report (TPAR) is required.
What is the results test for PSI?
The results test is one of four tests in Division 87 used to decide whether you run a personal services business. For at least 75% of your PSI, you must be paid to produce a result, supply your own tools and equipment, and be liable to fix defects at your own cost. Passing it lets you self-assess as a business, regardless of how concentrated your client base is.
Does PSI affect my super contributions?
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 under the extended employee definition in the Superannuation Guarantee (Administration) Act 1992. Where it does not apply, you fund your own super. Concessional contributions are deductible up to $30,000 for 2025-26, and non-concessional up to $120,000. Verify the caps against current ATO thresholds.
How do I apply for a PSI determination from the ATO?
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 professional advice before taking a position.