If you're a consultant, freelancer, or contractor operating through a company or trust, the ATO's Personal Services Income (PSI) rules could dramatically limit the deductions you can claim. In 2026, the ATO is using data-matching to identify businesses that are really just one person selling their labour.
1. What Is Personal Services Income?
PSI is income that is mainly a reward for your personal efforts or skills, rather than from a business structure. If more than 50% of your income comes from your own labour (rather than tools, assets, or other workers), your income is likely PSI.
Common examples:
- An IT contractor who works on-site at a single client's office.
- A management consultant who bills hourly for their advice.
- A graphic designer operating through a Pty Ltd but doing all the work themselves.
- A locum doctor or dentist providing services through a company.
2. The Four PSI Tests
To prove your income is not PSI (and therefore access full business deductions), you must pass at least one of these tests:
| Test | What It Means | Example |
|---|---|---|
| Results Test | You're paid for a result, not time; you provide tools; you fix defects at own cost | A builder paid per project with own tools |
| Unrelated Clients Test | You earn income from 2+ unrelated clients via public advertising | A bookkeeper with 15 clients found via website |
| Employment Test | At least 20% of your work is from employees or subcontractors | An agency with one employee doing 25% of billable work |
| Business Premises Test | You maintain a separate business premises (not home) | A physiotherapist renting a commercial clinic |
If you pass the Results Test, you're automatically exempt. If not, you need to pass any combination of the other three.
3. What Happens If PSI Rules Apply?
If your income is classified as PSI, you cannot:
- Split income with a spouse or family trust to reduce tax.
- Retain profits in a company to access the lower 25% company tax rate.
- Claim deductions for expenses that an employee in a similar role couldn't claim (e.g., rent for a home office beyond the ATO's set rate).
Essentially, the ATO treats you as if you're an employee — the income is attributed to you personally, taxed at your marginal rate, regardless of the entity that earned it.
4. Deductions You CAN Still Claim Under PSI
- Gaining or producing your PSI (e.g., tools, software, professional memberships).
- Self-education directly related to your current work.
- Travel between worksites (not home to a regular workplace).
- Insurance premiums (Professional Indemnity, Public Liability).
- Accounting and tax agent fees.
5. How to Structure Your Business to Avoid PSI
- Diversify your client base — don't rely on one client for 80%+ of revenue.
- Hire staff or subcontractors to perform at least 20% of billable work.
- Secure a commercial premises if your industry supports it.
- Contract for results, not time — fixed-price quotes instead of hourly rates.
- Get a PSI determination from the ATO if you're borderline — this gives you certainty.
Key Takeaways
- PSI rules prevent contractors from splitting income or retaining profits in a company.
- Pass at least one of the four tests to access full business deductions.
- The Results Test is the strongest — contract for outcomes, not hours.
- Diversify clients and hire staff to strengthen your business structure.
- Get a formal ATO determination if you're unsure about your PSI status.