Personal Services Income Rules in 2026

Personal services income (PSI) is income mainly earned from an individual’s efforts or skills. Classify the income first, then test whether a personal services business exemption applies before working out deductions, attribution and return entries.

What Personal Services Income Means

Income is PSI when more than half the reward under the relevant contract comes from one individual’s personal efforts or skills. Review the contract’s substance and the work performed. An invoice description alone cannot settle the question.

Where labour and materials form one service, assess that combined arrangement. If personal effort accounts for more than 50% of the reward, the whole amount is PSI. Assess genuinely separate obligations separately, such as consulting work and an unrelated sale of goods.

Income mainly produced by selling goods, substantial income-producing assets or an established business organisation falls outside PSI. Consider the relative contribution of employees and assets, goodwill and dependence on a particular individual. Incorporation alone does not establish a business organisation.

Keep these decisions separate when comparing personal services income with business income:

Decision	What to examine	What it establishes
Income character	What mainly earns the contract payment	Whether the income is PSI
Receiving entity	The contract’s parties and recipient	Whether a sole trader or a personal services entity receives it
PSB status	Tests or an applicable ATO determination	Whether the PSI deduction and attribution rules apply

A sole trader can earn PSI. A company, partnership or trust can receive an individual’s PSI as a personal services entity. Qualifying as a personal services business (PSB) leaves the income’s PSI character intact, while switching off the special PSI rules for that income.

The ATO explains these distinctions in TR 2022/3. PSB status also leaves general anti-avoidance provisions relevant to arrangements that divert or split income for a tax benefit.

Apply the Results Test

The results test allows PSB self-assessment where all three conditions apply to at least 75% of the individual’s PSI for the income year. Calculate that percentage by income, rather than by counting contracts.

1. The payment is for producing a specified result. Identify the agreed outcome and what must happen before payment becomes due. An ongoing hourly or daily engagement generally pays for work performed.
2. The individual or personal services entity must supply the equipment or tools needed to produce that result. Where the work needs none, this condition can still be met.
3. The individual or entity bears the cost of fixing defective work. Identify the actual liability, including damages where physical rectification is impossible.

A fixed fee alone does not establish all three conditions. Similarly, holding professional indemnity insurance does not replace an actual liability to rectify defects. A client refusing payment because they dislike the work is a different risk.

Keep the signed scope, payment milestones, equipment obligations and defect clauses together. Check amendments and actual conduct where they change the agreed obligations. Industry custom can help explain a contract, but cannot override a condition the arrangement fails.

Incorrect assessment: the client has an ABN and invoices through a company, so the results test passes. Correct assessment: the documented arrangements meet every condition for the required share of that individual’s PSI.

Check the Other Business Tests

If the results test fails, check the 80% rule before self-assessing under another PSB test. Combine PSI from each payer with PSI from that payer’s associates.

Where 80% or more comes from one source, the other tests cannot support ordinary PSB self-assessment. Passing the results test remains possible despite that concentration. Otherwise, consider whether the circumstances support an ATO personal services business determination.

The income source is generally the entity contractually obliged to pay. For an agency contractor, several end users can still mean one source where the same labour-hire agency owes every payment. Apply the special statutory agent rules only where their conditions are met.

Where less than 80% comes from each source, assess the available tests against the evidence:

PSB test	Conditions to establish	Evidence to keep
Unrelated clients	Services generate PSI from at least two clients unrelated to each other and the service provider. The work directly results from offers or invitations to the public or a section of it.	Client relationships, advertisements or tenders and evidence connecting the offer to each engagement
Employment	Others perform at least 20% of the principal work by market value, or apprentices are engaged for at least half the income year.	Contracts, work records, market-value calculations or apprentice engagement records
Business premises	Throughout the relevant operating period, premises mainly generate PSI, are used exclusively and are physically separate from private premises and client premises.	Lease or ownership documents, floor plans and records of actual use

For the employment test, bookkeeping support does not count as principal work unless bookkeeping is itself the contracted service. The individual whose PSI is being tested cannot count their own work as work performed by others. Other individuals generating their own PSI through the entity and associated entities also require the ruling’s exclusions to be checked.

Registering with a labour-hire agency alone does not satisfy the unrelated clients test. A shared desk or a room in the client’s office does not automatically satisfy the premises test either.

An ATO determination can address specified circumstances where a test could reasonably be expected to be met or unusual circumstances prevent qualification. Document why that route is available. Lodging an application alone does not establish PSB status.

Review the Client’s Work Examples

Classify the actual earning activity before drawing conclusions from an occupation. These fictional examples show which facts change the assessment.

Client activity	Facts pointing to PSI	Facts requiring a different assessment
Consultant	The client pays mainly for the individual’s advice and specialist knowledge.	A wider operation’s employees, assets and goodwill mainly produce the income.
Support worker	The individual personally provides the contracted care, with equipment playing a minor role.	The contract combines distinct services or a staffed operation delivers the service independently of that individual.
Tutor	Fees mainly reward the tutor’s personal teaching.	Income mainly comes from selling finished educational goods or a teaching business organisation.
Goods seller	Separately contracted personal advice requires its own assessment.	The payment mainly purchases ownership of finished goods.
Transport operator	A vehicle assists work mainly rewarded for personal effort.	Substantial equipment mainly produces the income, such as an income-producing heavy vehicle.

For Uber passenger driving, identify the transport contract and the role and value of the vehicle in earning fares. For Uber Eats or DoorDash delivery, identify what the delivery payment rewards and which party owes it. Examine delivery work separately from passenger transport or other activities.

Owning a car does not by itself prove that income mainly comes from an asset. Equally, an industry label cannot establish that every receipt is PSI. Apply the same contract and income-producing asset analysis to food delivery by bicycle or other vehicle.

After classification, apply the PSB tests to the relevant individual. A personally delivered service can be PSI while also meeting a PSB test. Use the personal services income tool to work through the supplied facts alongside the supporting contracts.

Work Out Attributed PSI

Attributed PSI is the individual’s net PSI included in their assessable income when a personal services entity receives it and the attribution rules apply. A sole trader already returns their own income, so entity-to-individual attribution is unnecessary.

For an entity, distinguish gross PSI from permitted deductions and salary promptly paid to the service individual. Salary qualifies for the prompt-payment exception when paid within 14 days after the PAYG payment period in which the entity derived that income. An ordinary year-end journal does not establish that a payment met this requirement.

Fictional Company Attribution Example

Assume a company receives only one consultant’s PSI and has no PSB exemption. All figures exclude GST where relevant. The company has $20,000 of permitted operating deductions, separate from the salary shown below, and no other expenses or income.

Calculation	Amount
Gross PSI received by the company	$120,000
Less permitted operating deductions	$20,000
Less gross salary promptly paid to the consultant	$60,000
Net PSI attributed to the consultant	$40,000

The calculation is $120,000 less $20,000 less $60,000, leaving $40,000. The individual reports $60,000 as salary and $40,000 as attributed PSI, with applicable withholding credits. The company excludes the attributed amount from assessable income through its tax reconciliation.

The ATO’s company return PSI instructions explain this reconciliation and the entity’s additional PAYG withholding obligations. Cash retained in the company does not prevent attribution.

Where two individuals generate PSI, identify each person’s income and assess PSB status separately. Allocate their direct expenses to the corresponding income. Apply the special entity-maintenance deduction sequence, including offsetting other income first, before allocating any excess between individuals.

There is no separate universal personal services income tax rate. Attributed PSI is taxed to the individual under the ordinary individual tax treatment that applies to them. Income covered by a PSB exemption follows the applicable ordinary entity rules, including relevant anti-avoidance provisions.

Check Deductions Against PSI

When the PSI rules apply, test expenses against the PSI restrictions as well as ordinary deduction requirements. A business payment and an invoice do not by themselves establish deductibility.

Occupancy costs for the individual’s residence, or a relevant associate’s residence, cannot reduce PSI. These costs include rent, mortgage interest, rates and land tax. Distinguish them from eligible home-office running expenses and costs for separate business premises.

Payments to associates for non-principal work, such as administering the consultant’s invoices, are restricted. Super contributions for that non-principal work are also denied. Principal-work payments and super contributions need their own assessment, including applicable limits.

The ATO’s PSI deduction guidance distinguishes these restrictions from allowable expenses. Depending on the facts, permitted costs can include professional indemnity insurance, registration fees, obtaining work and depreciation of income-producing assets. Entity car expenses also have specific restrictions where cars have private use.

Map each invoice to the person whose PSI it supports and identify any private or non-PSI share. Record the allocation basis for shared costs. Reconcile permitted deductions to the attribution calculation, with disallowed expenses added back where required.

Complete the Return’s PSI Questions

Answer the PSI receipt question for the income and entity the return asks about, then follow its PSB questions. Receiving PSI and being subject to the special PSI rules are separate answers.

For a sole trader, a PSB exemption can leave the initial PSI answer as Yes while directing income and expenses outside P1 Part B. PSI received through a company belongs in that entity’s assessment. The individual separately reports salary or attributed PSI at the appropriate labels.

If your tax software reports “personal services income amounts are not required”, diagnose the conflicting answers before changing any figures:

1. Confirm the entity, income year and whether the income is direct sole-trader PSI or attributed PSI.
2. Check the results-test answer and any determination covering the relevant period.
3. Review the 80% answer and any other PSB test selected. Confirm those answers match the saved contract assessment.
4. Follow the official return’s routing. In the 2026 individual return’s P1 schedule, qualifying PSB answers direct the reader to P2 instead of Part B.
5. Move incorrectly placed income and deductions to the required labels, preserving the correct classification. Check for duplication between P1 and P8, then run validation again.

Where the message persists despite consistent official routing, retain the error code and affected labels for the software provider. A validation message is not evidence that the income stopped being PSI.

Before lodging, reconcile the contract assessment, PSB evidence and permitted deductions to each person’s attribution calculation. Confirm the company reconciliation agrees with the individual’s attributed amount and withholding credits. Keep the reason for every material decision with the return workpapers.