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Australia Personal Services Income Guide

Australian Personal Services Income (PSI) rules. The guide covers: the PSI definition — the 'PSI' is the 'income that is mainly the reward for the personal efforts or the skills of the individual' under the 'Division 85 and the Division 86 of the ITAA 1997'; the 'PSI' includes the 'income from the work performed by the individual' (the 'consulting fees', the 'professional fees', the 'contractor payments') — the 'PSI does NOT include the income from the 'supply of the goods' or the 'income from the business structure' (if the 'individual employs the staff' or the 'business has the significant assets'); the PSI tests (the '80/20 results test') — the 'individual' can 'avoid the PSI rules' if the 'income meets the 'results test' (the '80/20 test'); the 'results test' has the 'four conditions': (i) the 'income is for the 'result' (the 'specific outcome' or the 'specific project') NOT the 'time spent', (ii) the 'individual provides the 'plant and equipment' or the 'tools of the trade' (the 'own equipment'), (iii) the 'individual is 'liable for the rectification of the defective work' (the 'liability for the defects'), (iv) the 'individual is 'required to provide the 'personal service' but the 'services can be delegated' to the 'other persons' (the 'delegation'); the 'results test' is the 'most common test' for the 'independent contractors'; the 'unrelated clients test' (the '80/20 test') — the 'individual receives the PSI from the 'two or more unrelated clients' and the 'one client does NOT provide more than 80% of the PSI'; the 'employment test' — the 'individual is NOT the 'employee' under the 'common law' and the 'individual is NOT the 'servant' of the 'client'; the 'business premises test' — the 'individual maintains the 'business premises' that are 'exclusive to the business' and are NOT the 'private residence'; the PSI entity rules (Division 86) — the 'PSI entity' (the 'personal services entity' — the 'company', the 'trust', or the 'partnership' that 'receives the PSI') is subject to the 'Division 86 rules'; the 'PSI entity must 'allocate the PSI to the individual' (the 'personal services individual') and the 'individual pays the tax at the 'marginal rate' on the 'PSI'; the 'PSI entity can 'retain the '15% of the PSI' as the 'entity income' (the 'PSI entity retains the 15% of the PSI for the 'business deductions' and the 'entity tax'); the PSI deductions — the 'PSI deductions' are 'limited' under the 'Division 85' — the 'individual can deduct the 'expenses directly related to the PSI' (the 'travel', the 'equipment', the 'home office') but the 'non-PSI deductions' (the 'personal expenses' and the 'private expenses') are NOT 'deductible against the PSI'.

PSI Tests

  • Results test: The 'income is for the 'result' (the 'specific outcome' or the 'project'). The 'individual provides the 'own equipment', is 'liable for the defects', and can 'delegate the work'.
  • Unrelated clients test (80/20): The 'individual receives the PSI from the 'two or more unrelated clients' and the 'one client does NOT provide more than 80% of the PSI'.
  • Employment test: The 'individual is NOT the 'employee' under the 'common law' — the 'individual does NOT work under the 'direction' or the 'control' of the 'client'.

For the starting business and the business structures, see our Starting a Business Guide →.

PSI Entity Rules

  • Personal services entity: The 'company', the 'trust', or the 'partnership' that 'receives the PSI'. The 'entity must 'allocate the PSI to the individual' (the 'personal services individual').
  • 15% retention: The 'PSI entity can retain 15% of the PSI for the 'business deductions' and the 'entity tax'.
  • PAYG withholding: The 'PSI entity' must 'withhold the PAYG' on the 'payments to the individual' (the 'personal services individual').

For the company tax rules and the corporate tax returns, see our Corporate Tax Guide →.

PSI Deductions

  • Direct PSI expenses: The 'expenses directly related to the PSI' are 'deductible' — the 'travel expenses', the 'equipment', the 'home office expenses', and the 'insurance'.
  • Non-deductible expenses: The 'personal expenses' and the 'private expenses' are NOT 'deductible against the PSI'.

For the business expenses and the home office deductions, see our Business Expenses Guide →.