You invoice through your business, carry insurance and pay for your own equipment. You may still earn personal services income. That is not a criticism of the business or a suggestion that you have done something wrong. It is a tax classification that needs to be assessed properly.
Personal services income, usually shortened to PSI, is mainly a reward for an individual’s personal effort or skill. The first question concerns the nature of the income. The next is whether the PSI rules apply to it. Those questions are related, but they are not interchangeable.
Start with the work behind the invoice
A contractor’s business can earn income from different sources. Some may be mainly for personal expertise; other income may depend on substantial equipment, goods or a broader business operation. Look at what the customer is paying for, not simply the industry label on an ABN.
Assess the actual arrangements and keep the contracts. If several people generate income through one entity, the analysis may need to be undertaken for each individual. A single company-wide answer can miss how differently those people work.
The results test asks more than whether you delivered something
The ATO’s results test considers whether, for at least 75% of the relevant PSI, you are paid to achieve a result, provide the necessary tools or equipment where required, and are liable for the cost of fixing defects.
All relevant conditions matter. Sending an invoice at the end of a project does not automatically establish payment for a result. Nor does owning a laptop settle the entire test. How the contract operates in practice should support the answer you give.
Illustrative example: A consultant works under a daily rate arrangement and is paid for approved time. Another contract specifies a completed deliverable for an agreed fee, with genuine responsibility for rectifying defects. Both consultants may describe their work as projects. Their commercial arrangements still require separate assessment; the word “project” is not the test.
One large client changes the next step
If the results test is not met, the concentration of income matters. Where 80% or more of an individual’s PSI comes from one client and its associates, the business generally cannot self-assess using the other personal services business tests. It may need an ATO determination to establish that the PSI rules do not apply.
Where less than 80% comes from that source, one of the other tests must still be satisfied. Having several customers does not automatically make the business a personal services business. The ATO sets out this sequence in its self-assessment guidance.
For the unrelated clients test, consider how work was obtained as well as whether the clients are unrelated. Offers to the public and the connection between those offers and the work matter. The ATO’s unrelated clients guidance explains why counting invoices alone is insufficient.
What changes if the PSI rules apply?
The rules can limit deductions and affect how income received through a company, partnership or trust is attributed to the person who earned it. For example, deductions for payments to associates for non-principal work are restricted. Do not assume that putting a family member on the books produces the intended tax result.
At the same time, PSI does not mean that every legitimate expense disappears. The ATO’s deductions guidance distinguishes expenses that can be claimed from those that are restricted. Your records and business arrangements still matter.
Passing a personal services business test also does not create an unrestricted right to split income or retain profits for a tax advantage. The ATO explains that general anti-avoidance rules can remain relevant. Treat a test result as part of the assessment, rather than a universal clearance.
Keep a small evidence file while the work is happening
Save signed contracts and variations, invoices, the basis for pricing, relevant advertising and records of how enquiries became engagements. Note who supplies equipment, who performs the work and who bears the cost if something needs fixing. These details are easier to capture now than reconstruct after a busy year.
Review the position when your largest contract changes, a new person joins the business or your method of charging changes. A conclusion from last year may not describe this year’s activity.
Take the evidence to your accountant before relying on a particular tax treatment. The useful question is not “Can we call this a business?” It is “What does the income arise from, which tests are available, and what supports the answer?” That gives you a position you can understand and maintain.
Target Advisory 