PSI vs PSB in Australia: Rules, Tests, Deductions & Tax

Updated June 23, 2026 by Eduyush Team

PSI vs PSB in Australia: The Tests, the Deductions, and Which Tax Return You File

Last reviewed: June 2026 · Reflects current ATO Personal Services Income rules and PCG 2025/5 guidance on PSB arrangements and Part IVA. This is general information, not personal tax advice.

If your income is mainly a reward for your own effort or skill, you are earning Personal Services Income (PSI) — and one question decides everything that follows: do you qualify as a Personal Services Business (PSB), or do the restrictive PSI rules apply? The answer changes which deductions you can claim, whether you can split income with family, and which tax return you lodge. This guide explains all three, with the four PSB tests, worked examples, and a deduction list for every model.

Key facts at a glance

  • PSI is income that's mainly a reward for one person's skill or effort. If the income would stop the moment you stopped working, it's almost certainly PSI.
  • You escape the PSI rules by qualifying as a PSB — pass the results test, or earn under 80% from one client and pass one of three other tests.
  • When the PSI rules apply, you cannot claim home occupancy costs (rent, mortgage interest, rates, land tax) or payments to family for admin work — even through a company or trust.
  • An ABN does not make you a company. A sole trader with an ABN files an individual return.
  • Income splitting only works if you are a genuine PSB. If the PSI rules apply, the income is attributed back to you at your marginal rate no matter what structure you use.
  • Keep PSI records for at least 5 years.

What is Personal Services Income (PSI)?

Personal Services Income (PSI): income produced mainly (more than 50%) as a reward for an individual's personal efforts, skills or expertise — rather than from selling goods, using business assets, or employing others to do the work. It can be earned as a sole trader or through a company, partnership or trust; the structure does not change whether the income is PSI.

The simplest real-life test to apply: if you stopped showing up, would the income still arrive? If it walks out the door the moment you do, you are the product — and that's PSI. A consultant, contractor, freelancer, IT specialist, medical locum or tradesperson paid for their own labour is typically earning PSI.

What is a Personal Services Business (PSB)?

Personal Services Business (PSB): a status (not a structure) that switches off the restrictive PSI rules. If you qualify as a PSB, your PSI is treated like ordinary business income — normal deductions apply and the income is not automatically attributed back to you.

You become a PSB by passing at least one of four tests. Passing a single test is enough. The results test is the strongest; the other three are only available if you earn under 80% of your PSI from any one client.

How do you pass the PSI tests to become a PSB?

Work top to bottom. The moment you clear a gate, you're a PSB and you stop — the PSI restrictions never apply.

Is the income mainly a reward for your personal effort or skill?
If the income would stop the moment you stopped showing up — it's PSI.

GATE 1 — The Results Test
Paid for a result + you supply your own tools/equipment + you're liable to fix defects at your own cost. Met for at least 75% of your PSI?
↓ Pass
You're a PSB PSB
Stop here. Restrictions don't apply.
↓ Fail — keep going
GATE 2 — The 80% Rule
Did 80% or more of your PSI come from one client (and their associates)?

80%+ from one source → Yes
PSI rules apply PSI
Unless you hold an ATO PSB determination.
Under 80% from each → self-assess
GATE 3 — Pass ANY ONE of three tests
Unrelated Clients · Employment · Business Premises

Pass any one
You're a PSB PSB
Fail all three
PSI rules apply PSI

The four tests, with pass/fail examples

1 The Results Test Gateway — pass this and you're done

You must meet all three conditions for at least 75% of your PSI: you're paid to produce a result, you supply your own tools and equipment where the work requires them, and you're liable to rectify defects at your own cost.

The bar to clear: a genuine business sells the finished cake; a PSI worker sells their baking hours. You must be selling cakes.
✓ PassesMaya, a freelance designer, quotes a fixed $4,000 to deliver a finished brand kit, works on her own computer and software, and re-does work to meet the brief at no extra charge.
✗ FailsRaj contracts to one bank at $80/hour through an agency, uses the bank's equipment, and is only ever paid for hours worked.
2 The 80% Rule A gate, not a pass

This decides whether you're even allowed to self-assess against the next three tests. If 80% or more of your PSI comes from a single client (and associates), you cannot self-assess — the PSI rules apply unless the ATO grants a determination.

The bar to clear: stay under 80% from every single source. One client dominating your income makes you look like an employee in a contractor costume.
✗ Gate closesRaj earns 100% of his contracting income from one bank → over 80% from one source → he can't use the three tests below.
✓ Gate opensPriya, a bookkeeper, has six clients; her largest is 35% → under 80% from each → she may self-assess.
3The Unrelated Clients Test

You provide services to two or more clients who are unrelated to you and to each other, and you won that work by making offers to the public — advertising, a website, tendering or genuine word of mouth.

The bar to clear: clients must be genuinely unrelated and won through public offers. Work funnelled through a single labour-hire agency generally does not count.
✓ PassesPriya advertises online and via word of mouth, servicing six unrelated small businesses she found that way.
✗ FailsTom does IT work for three companies — but all three are subsidiaries of one parent group, and he got every job through one agency.
4The Employment Test

You engage one or more other people (employees or subcontractors — not yourself) to perform at least 20% by market value of the principal work; or you employ an apprentice for at least half the income year.

The bar to clear: the 20% must be the principal work — the actual skilled service. Paying someone for admin or reception doesn't count.
✓ PassesSarah subcontracts 25% (by market value) of her project delivery to another developer doing genuine principal work.
✗ FailsSarah does all the consulting herself and only pays a bookkeeper for admin.
5The Business Premises Test

Throughout the year you maintain business premises that are mainly used for your work, used exclusively by you, physically separate from your home, and physically separate from your clients' premises.

The bar to clear: a genuine, separate place of business — not the spare bedroom. "Separate from home" is where most people fall down.
✓ PassesDaniel rents a commercial photography studio used only for his business, away from home and clients, all year.
✗ FailsDaniel shoots from a converted spare bedroom at home.

Quick PSI reality check: are you PSI or PSB?

Use this as a fast self-diagnosis. It points to the likely outcome — always confirm against the full tests above.

Your situation Likely outcome
One client, paid hourly, uses the client's equipment PSI
Fixed-price projects, own equipment, you rectify defects Likely PSB
100% of income from one labour-hire agency Usually PSI
Several unrelated clients won through advertising Often PSB
Company set up, but you fail the PSB tests PSI rules still apply

Common PSI scenarios (self-diagnosis personas)

The same tests land differently depending on how you actually work. Three everyday examples — and once you know your status, the deductions then vary by trade, which we map in the occupation tax deductions guide.

IT Contractor

One bank client.
Paid hourly.
Works on bank equipment.

→ Usually PSI

Bookkeeper

Six clients.
Advertises online.
Works independently.

→ Often PSB

Engineer

Fixed-price projects.
Own software.
Defect liability.

→ Often passes the results test

The PSI questions that matter most

If you ask yourself only a handful of questions, ask these — each maps directly to a test.

Question Why it matters
Who pays you? The 80% rule
How are you paid — for a result, or for hours? Results test
Who supplies the equipment? Results test
Do you fix defects at your own cost? Results test
How many unrelated clients do you have? Unrelated clients test
Do you employ others to do the principal work? Employment test

What deductions can you claim under each PSI model?

Here's the part most guides get wrong. The deduction restriction is driven by whether you're PSI or PSB — not by your structure. A sole trader and a company that both fail the PSB tests face the same restricted list. What the structure changes is whether you can retain or split income. The four models below make this concrete. Whichever model applies, every individual expense must still pass the ordinary deductibility test — see our three-rule test for work deductions.

Model 1 — Sole trader, PSI rules applyMost restricted

Treated as if you were an employee. Deductions go at Item P1 Labels K & L (not D1–D5) and the net flows to Item 14.

✓ You can claim
  • Tools, equipment and work-related supplies
  • Professional indemnity, public liability and workers comp insurance
  • Registration, licence and compliance fees
  • Bank and account-keeping fees; tax agent / BAS fees
  • Home office running costs (electricity, heating, lighting)
  • Super contributions for yourself (the principal worker)
  • One car for work use; depreciation of income-producing assets
✗ You cannot claim
  • Home occupancy: rent, mortgage interest, rates, land tax
  • Payments to a spouse/associate for non-principal (admin) work
  • Super for an associate doing non-principal work
  • A second car used privately at the same time
  • Anything private or domestic in nature
Files: individual return. Income taxed at your marginal rate. No income splitting available.
Model 2 — Sole trader, qualifies as a PSBDeductions open up

Normal business deduction rules apply. The restrictions in Model 1 fall away.

✓ You can claim
  • Everything in Model 1, plus
  • Home occupancy expenses (rent, mortgage interest, rates, land tax) — but only where the work area has the character of a "place of business": used exclusively or almost exclusively for the business, identifiable as such, and not readily usable for private purposes
  • Reasonable payments to associates for genuine work performed
  • The full range of ordinary business deductions
✗ Still can't claim / watch-outs
  • Private or domestic portions of any expense
  • Income splitting — you're still the individual, so there's no one to split to
  • CGT cost: claiming occupancy (or having an area with the character of a place of business) can reduce your main residence exemption when you sell
Files: individual return, income through the business schedule (Item P8). Marginal rate, but unrestricted deductions.
Model 3 — Company or trust, PSI rules applyThe trap

Same restricted deduction list as Model 1 — the company structure buys you nothing on deductions — and the net PSI is attributed straight back to the individual.

✓ The entity can claim
  • The same employee-equivalent expenses as Model 1
  • Salary and super paid to the individual who earned the PSI
  • Limited "entity maintenance" costs (ASIC fees, tax agent, bank fees) — but these must offset other income first
✗ The entity cannot claim
  • Home occupancy or associate non-principal payments (as Model 1)
  • It cannot retain or split the net PSI — it's attributed to the individual
  • A net PSI loss can't offset other company income; it transfers to the individual (Item D15)
Files: entity return PLUS the individual return. Extra PAYG and lodgement obligations for no tax benefit.
Model 4 — Company or trust, qualifies as a PSBThe only structure that pays off

Full business deductions and genuine structuring options. This is the only model where a company or trust actually earns its keep.

✓ The entity can claim
  • All ordinary business deductions; occupancy expenses where there's a genuine market-rate rental agreement between you (the owner) and the entity, and the area has the character of a place of business
  • Genuine salary and super to family members for real work
  • Income retained at the company tax rate, or distributed via a trust
✗ Watch-outs
  • Splitting must reflect genuine contribution and survive Part IVA (see PCG 2025/5)
  • Private/domestic portions remain non-deductible
Files: entity return; the individual reports salary, dividends or distributions on their own return.

Deductions side by side

Deduction PSI rules apply
(Models 1 & 3)		 PSB
(Models 2 & 4)
Tools, equipment, supplies ✓ Yes ✓ Yes
PI / public liability / workers comp insurance ✓ Yes ✓ Yes
Registration, licence, account-keeping, tax fees ✓ Yes ✓ Yes
Home office running costs (power, lighting) ✓ Yes ✓ Yes
Super for the principal worker (you) ✓ Yes ✓ Yes
One work car ✓ Yes (one only) ✓ Yes
Home occupancy (rent, mortgage interest, rates, land tax) ✗ No ✓ Only if the area has the character of a "place of business" (CGT may apply on sale)
Payments to associates for non-principal work ✗ No ✓ If genuine
Income splitting / retention via the entity ✗ No — attributed to you ✓ Yes (subject to Part IVA)

Which tax return do you file?

The return follows the entity, never the ABN. PSB status changes the deduction treatment and whether income can be split — not which form is lodged.

An ABN

Just a registration number. Creates no separate entity and doesn't decide your return.

Your entity

Sole trader, company, trust or partnership — this decides which return is lodged.

PSB status

A status, not a structure. It switches off the PSI restrictions.

Your situation Who lodges what Where the income sits
Sole trader + ABN, PSB Individual return Business income (Item P8) → main return
Sole trader + ABN, PSI Individual return Item P1 Part B → Item 14
Company / Trust, PSB Entity return, lodged separately Retained or distributed by the entity
Company / Trust, PSI Entity return plus your individual return Net PSI attributed back to you personally

What is the PSI company trap?

Worst of every world

A contractor sets up a company hoping to split income with a spouse — but they fail the PSB tests. The company still lodges its own return, they still pay ASIC fees and extra accounting costs, and the PSI is attributed straight back to the individual at their marginal rate. They've taken on all the cost and complexity of a company for zero tax saving.

The rule of thumb: a company or trust only saves PSI tax if you genuinely qualify as a PSB first. Test the results test or the 80% rule before you incorporate — not after.

Frequently asked questions

Can I claim home office rent or mortgage interest under the PSI rules?

No. When the PSI rules apply, you cannot claim rent, mortgage interest, rates or land tax for your home, even if you work from a dedicated room. You can still claim running expenses such as electricity, heating and lighting. Occupancy costs only become claimable if the PSI rules don't apply to you (you qualify as a PSB) and the work area genuinely has the character of a "place of business" — used exclusively for the business and identifiable as such. Even then, claiming occupancy can reduce the main residence CGT exemption when you sell your home.

Can I split PSI income with my spouse through a company or trust?

Not if the PSI rules apply. The net PSI is attributed back to the individual who earned it and taxed at their marginal rate, regardless of the structure. Income splitting is only available if you genuinely qualify as a PSB — and even then it must reflect real contribution and survive the Part IVA anti-avoidance rules.

Does having an ABN mean I file a company tax return?

No. An ABN is only a registration number and does not create a company. A sole trader with an ABN files an individual tax return. You only lodge a company return if you have actually registered a company with its own ACN and TFN.

What deductions can a PSB claim that a PSI worker cannot?

A PSB can claim normal business deductions, including home occupancy expenses where there is a genuine place of business and payments to associates for genuine work. A PSB operating through a company or trust can also retain income at the company rate or distribute it, subject to Part IVA. A worker under the PSI rules is limited to employee-equivalent deductions.

What is the results test for PSI?

You pass the results test if, for at least 75% of your PSI, you are paid to produce a result, you supply your own tools and equipment where the work requires them, and you are liable to fix defects at your own cost. Passing it makes you a PSB regardless of the 80% rule.

Is an IT contractor's income PSI or PSB?

It depends on how they work. An IT contractor with one client, paid hourly and using the client's equipment, is usually earning PSI with the rules applying. An IT contractor paid a fixed price to deliver a result, using their own equipment and liable to fix defects at their own cost, generally passes the results test and is a PSB. The label, hourly versus fixed-price, and who supplies the equipment are the deciding factors — not the job title.

How long do I need to keep PSI records?

At least five years from when the records are prepared, obtained or the transaction is completed, whichever is later. You also need to be able to show whether each expense relates to your PSI or to other income. For the full record-keeping thresholds, see our tax substantiation guide.

Related Eduyush guides

Sources & further reading (ATO): Personal services income — what to do when the PSI rules apply; Claiming deductions when receiving PSI; How to attribute PSI; Personal services business tests; PCG 2025/5 (PSB arrangements and Part IVA). Always confirm current thresholds and rules at ato.gov.au for your specific circumstances.

 

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