If you operate as a sole trader or through a company and most of your income comes from your own labour and skills — not from selling goods or running a business with employees — the ATO's Personal Services Income (PSI) rules may apply to you. And if they do, you lose access to some significant deductions and tax planning strategies.

This is one of the least-understood tax rules affecting self-employed tradies, and getting it wrong can mean overclaiming deductions or structuring your income in ways the ATO won't accept.

What Is Personal Services Income?

Personal Services Income (PSI) is income you earn mainly from your own personal efforts or skills, rather than from selling goods, using equipment, or running a business that employs others.

The ATO's definition: PSI is income that is "mainly a reward for your personal efforts or skills."

Trade examples likely to be PSI:

  • A solo electrician who works exclusively for one builder
  • A self-employed painter contracted to one property manager
  • A plumber who provides their labour only — no materials, no employees
  • An IT contractor working full-time for one company

Trade examples unlikely to be PSI:

  • A plumbing business with 4 employees
  • A carpentry business that supplies materials as well as labour
  • An electrician who works for multiple unrelated clients
  • A builder who runs construction projects with subcontractors

The critical distinction: are you in business, or are you essentially a disguised employee?

Why the PSI Rules Exist

Without PSI rules, a worker could set up a company, have their employer pay the company, and access tax rates and deductions not available to employees. This undermines the integrity of the income tax system.

The PSI rules are designed to prevent this. If your income is classified as PSI, the tax outcomes largely mirror what an employee would face — even if you operate through a company or trust.

The Four Tests: Do PSI Rules Apply to You?

The ATO applies a series of tests to determine whether PSI rules apply. First, you check the results test. If you pass that, PSI rules don't apply. If you fail it, you move to three additional tests to see if you qualify as a "Personal Services Business" (PSB). If you can't pass at least one of those three, PSI rules apply.

Test 1: The Results Test (the Gateway)

You pass the results test if all three of the following are true:

  1. You're paid for producing a result (not just for your time)
  2. You supply your own tools and equipment (or they're not needed)
  3. You're liable to fix defective work at your own cost

What this means for tradies: Most genuine trade businesses pass the results test because:

  • They're paid for completed jobs (results), not just time
  • They supply their own tools
  • They're responsible for defects under warranty

A solo electrician working under a time-and-materials contract on a single builder's sites, using the builder's tools, without personal liability for defects — may fail this test.

If you pass the results test, PSI rules do not apply. You stop here.

Test 2: The Unrelated Clients Test

If you fail the results test, you look at whether you have multiple unrelated clients. You pass if:

  • You supply services to two or more unrelated clients in the income year AND
  • Those services result from a genuine business relationship — not just being sent by one entity to multiple places

Tradies with multiple, unrelated clients typically pass this test easily. A plumber who works for 15 different homeowners, a concreter with a varied commercial client base — these are genuine businesses with unrelated clients.

The test is designed to catch workers who are contracted out to multiple sites but effectively work for one company directing them.

Test 3: The Employment Test

You pass if you employ one or more employees (or engage subcontractors) who perform at least 20% of the principal work.

What this means: If you have an employee doing 20%+ of the actual work, you're running a business — not just selling your own labour. PSI rules don't apply.

This is one reason many growing tradie businesses benefit from taking on staff or engaging regular subbies.

Test 4: The Business Premises Test

You pass if you maintain and use business premises that:

  • Are genuinely used for performing services
  • Are physically separate from your home (or the client's premises)
  • Cost you money (rent or mortgage)

A dedicated workshop, depot, or office space you pay for and use to conduct your trade business satisfies this test.

A spare bedroom or a designated corner of the garage typically does not.

If PSI Rules Apply: What Changes?

If you fail the results test and can't pass any of the three PSB tests, PSI rules apply. Here's what that means:

For Sole Traders

The main impact is on deductions. When PSI rules apply, you can't claim:

  • Payments to your associates (spouse, family members) for work that isn't at market rate
  • Rent you charge yourself for using part of your home as an office
  • Mortgage interest on your home office

The good news: you can still claim standard work-related deductions — tools, materials, vehicle, insurance, training. PSI doesn't eliminate all deductions; it just restricts the specific ones above.

For Companies and Trusts

This is where PSI rules have a bigger impact.

If your PSI is earned through a company or trust, the company/trust must attribute the income to you — the individual — for tax purposes. You can't:

  • Retain income in the company at the 25% company rate to reduce your personal tax
  • Split income among family members via trust distributions
  • Access small business entity concessions that would otherwise be available

The practical result: operating through a company or trust provides no tax benefit when PSI rules apply. Your income is treated as if you received it directly.

The Contractor vs Employee Distinction and PSI

PSI rules are separate from — but related to — the question of whether you're genuinely a contractor or actually an employee.

The ATO has recently (2024 onwards) applied new tests for contractor classification. The High Court decisions in CFMMEU v Personnel Contracting and ZG Operations v Jamsek established that the written contract between parties is the primary determinant — not the actual working arrangement.

This means:

  • A contract that says "contractor" is evidence of contractor status
  • But the ATO can still apply PSI rules even to genuine contractors

These are two separate compliance layers:

  1. Employment status: Are you an employee or contractor? (Affects super, PAYG withholding obligations on the payer)
  2. PSI rules: Does your income attract special treatment for your own tax return?

You can be a genuine contractor but still have PSI income.

Practical Examples

Example 1: Solo Electrician — PSI Applies

Marco works as a sole trader electrician. He works exclusively for one commercial builder. He works Monday-Friday on the builder's sites, uses the builder's scissor lifts and safety equipment, charges an hourly rate, and the builder's foreman tells him where to go each day.

  • Results test: Fails (paid for time, not results; uses builder's equipment; not liable for defects)
  • Unrelated clients test: Fails (one client)
  • Employment test: Fails (no employees or subbies doing his work)
  • Business premises test: Fails (no separate premises)

PSI rules apply. Marco can't retain income in a company at lower rates. His income is attributed to him personally.

Example 2: Plumbing Business — PSI Does Not Apply

Sarah runs a plumbing business. She has 2 apprentices who do 40% of the work. She works for 30+ different residential clients. She supplies all materials. She's liable for defects under her builder's warranty.

  • Results test: Passes (paid for completed jobs, supplies tools, liable for defects)

PSI rules do not apply. Sarah is running a genuine business. She can structure her income through a company or trust as appropriate.

Example 3: Carpenter Subcontractor — Borderline

Dave is a carpenter who works primarily for one builder but also takes on 3–4 residential jobs per year independently. He uses his own tools and is responsible for his work.

  • Results test: Passes (uses own tools, paid for results, liable for defects)

PSI rules do not apply. Even borderline situations often pass the results test if the tradie supplies their own tools and is genuinely responsible for outcomes.

Getting a Personal Services Business Determination

If you're uncertain whether PSI rules apply to your situation, you can apply to the ATO for a Personal Services Business (PSB) Determination. This is a formal ruling that confirms whether the PSI rules apply to your specific circumstances.

A PSB determination provides certainty — the ATO won't later reassess you based on PSI rules if they've formally confirmed you're a PSB.

Your tax agent can lodge this application on your behalf. It's worth doing if:

  • You operate through a company or trust
  • You have a single dominant client
  • You're earning significant income and the tax implications of PSI rules are material

How to Structure Your Business to Avoid PSI

If PSI rules currently apply to you and you want to move to PSB status:

1. Diversify your client base. Work for multiple unrelated clients rather than one dominant client. Even a 60/40 split between two unrelated clients is better than 100% from one.

2. Hire employees or engage regular subcontractors. Once employees are doing 20%+ of principal work, you pass the employment test.

3. Establish genuine business premises. A separate workshop or depot (separate from your home) helps pass the business premises test.

4. Ensure you're paid for results. Charge for completed jobs, not just hours. Include warranty provisions in your contracts. Use your own tools.

5. Get a proper contract in place. The written contract should reflect a genuine business relationship — scope of works, payment for completion, liability provisions.

Common Mistakes Tradies Make with PSI

Mistake 1: Assuming all subcontractors are exempt from PSI. Just being a contractor doesn't exempt you. PSI rules apply based on the nature of your income, not your employment classification.

Mistake 2: Setting up a company without understanding PSI. Many sole traders set up a company thinking they'll save tax. If PSI rules apply, the tax advantage disappears — but the compliance costs of a company remain.

Mistake 3: Not checking PSI status after expanding. A tradie who passes PSI tests when they have employees but later lets staff go (during a slow period) may inadvertently trigger PSI rules — without realising.

Mistake 4: Overclaiming deductions when PSI applies. Claiming rent from yourself, above-market family member wages, or other restricted deductions when PSI rules apply risks ATO adjustment and penalties.

Comparison: PSI vs Personal Services Business

  • Income retention in company — Not permitted — Permitted
  • Trust income splitting — Not permitted — Permitted
  • Associate wages (family) — Restricted — Permitted at market rates
  • Home office occupancy costs — Restricted — May be claimable
  • Standard deductions (tools, materials) — Still claimable — Still claimable
  • Tax planning flexibility — Significantly limited — Full flexibility
  • Company structure benefit — Nil for PSI income — Full company tax advantage

Frequently Asked Questions

Q: I work for multiple clients through a labour hire agency. Does PSI apply?
Potentially. If the agency directs your work and you're essentially working as an employee through the agency, PSI rules may still apply. The unrelated clients test looks at whether the clients are genuinely unrelated — clients sent by the same agency may be considered related.

Q: My income is 80% from one client and 20% from others. Do PSI rules apply?
The tests are binary — you either pass or fail. If you pass the results test or any of the PSB tests, PSI rules don't apply regardless of client concentration. If you fail all tests, PSI rules apply to your entire PSI income, not just the 80%.

Q: Can I have both PSI and non-PSI income?
Yes. If you sell products as well as your labour, or you have employees doing some work, you may have a mix. The non-PSI portion (from sales, from work done by employees) is not affected by PSI rules. Your accountant can help separate the two.

Q: Does PSI affect my super contributions?
PSI rules affect your income tax treatment, not your superannuation obligations directly. However, if PSI income is attributed to you personally through a company, and you're also an employee of that company, super is paid on your salary in the usual way.