A Sydney contractor has finished a demanding month, invoised through a company, and is now wondering whether the income can remain there rather than being attributed personally. The answer depends on what the contract rewards, how concentrated the client base is, which personal services business test may be available, and whether the entity reports the income correctly.
Personal services income (PSI) is income produced mainly from an individual's own skills or efforts. Under the Australian Taxation Office (ATO) rule, if more than 50% of a contract's income rewards personal labour, skills or expertise, the entire income from that contract is PSI. If 50% or less relates to personal efforts or skills, none of that contract income is PSI. The ATO's PSI guidance sets out this strict contract-based threshold.
Introduction Who This Guide Is For and What PSI Means for You
This guide is for Australian medical professionals, consultants, contractors, engineers, IT specialists, labour-hire workers, and small professional firms using a sole trader, company, partnership or trust. It may also help new migrants establishing a professional practice, particularly where an entity receives fees for work personally performed by one individual.
Currency note: This article reflects Australian rules, thresholds and regulator guidance current as at 09/2026.
The first decision isn't whether a company or trust exists. It's whether the relevant contract mainly pays for a person's expertise, or whether the income is generated by a broader business engine involving assets, goods, staff or an established commercial operation. A company can receive the invoice, but that fact alone doesn't turn personal effort into ordinary business income.
The ATO says PSI can be earned directly by a sole trader or indirectly through a company, partnership or trust acting as a personal services entity. The legal classification follows the nature of the income, not the name on the bank account. Only an individual can have PSI, even when the income is received by an entity.
That distinction matters because PSI may need to be attributed back to the individual who performed the work. Deduction rules, income splitting and tax return disclosures may also change. A careful review can therefore protect more than the tax calculation. It can clarify how contracts are written, how invoices are separated, how cash is retained, and what evidence supports the chosen treatment.
Stewardship principle: A structure should describe the work being done, not obscure who created the value.
What Personal Services Income Really Is Under ATO Rules
The simplest way to understand PSI is to ask where the income comes from. If the primary source is your personal skill, judgement, labour or expertise, the income may be PSI. If the primary source is a product, equipment, intellectual property exploited independently, investment capital or a broader operating business, the income may not be PSI.
The ATO's ruling describes PSI as income produced mainly, meaning more than 50%, from an individual's personal skills or efforts rather than assets, goods or a business structure. The ruling also states that the source is determined by the entity with the contractual obligation to pay. That point can be important in labour-hire arrangements, where the commercial chain may contain several entities but the contract identifies who is obliged to pay.
The contract is the starting point
PSI is assessed contract by contract. This prevents a broad label such as “consulting income” or “medical income” from deciding the result by itself.
Consider a technology consultant who supplies a software licence, configuration tools and a documented product. If the contract mainly pays for access to a separately functioning product, that may point away from PSI. If the client is primarily paying the consultant to analyse a problem, make decisions and provide personal recommendations, the income may be PSI.
A bundled invoice needs particular care. A retainer that combines personal advice, project management, software access and deliverables shouldn't be classified from the invoice description alone. The agreement, scope of work, pricing logic, risk allocation and evidence of what was supplied may all help show what the client paid for.
You can find a plain-language overview in Everglow's guide to personal services income in Australia. The central question remains consistent: did the contract mainly reward the individual's personal efforts or something generated independently of that person?
The PSI rules exist to address arrangements where income from an individual's work is redirected through an entity to split or defer tax. That doesn't mean every company used by a professional is improper. It means the company's existence must be considered alongside the actual service arrangement and the available personal services business tests.
How to Work Out If the PSI Rules Apply to You
The 80% rule is an important gateway after you've identified PSI. If 80% or more of your PSI comes from one client and that client's associates in an income year, you don't meet the rule and the PSI rules apply. The ATO's guidance on self-assessing as a personal services business explains this concentration test.
The test applies to the individual who generates the PSI, even when a company, partnership or trust receives the fees. A professional may therefore need to examine the actual source of each person's PSI rather than assess the entity's total turnover as one pool.
Follow the concentration logic
If one hospital, insurer, agency, practice network or related client group provides most of the relevant PSI, the concentration rule may prevent self-assessment through the other PSB tests. In that situation, the PSI rules generally apply unless the results test is satisfied.
If less than 80% comes from one client and associates, the taxpayer may self-assess as a personal services business only if another PSB test is also met. Passing the concentration gateway alone isn't enough.
Indirect customer relationships can cause confusion. A contractor might serve many patients or end users, yet receive payment from one agency. The analysis focuses on the contractual and payment arrangements relevant to the PSI, not the number of people who ultimately benefit from the work.
Keep the analysis individual and evidence-based
For each person generating PSI, retain a clear schedule showing the contracts, clients, associates, income streams and relevant test. Keep copies of agreements, invoices, work orders and correspondence. A spreadsheet can help organise the calculation, but it doesn't replace the underlying evidence.
The result should be a defensible decision path. First classify the contract. Then test client concentration. Only after that should you decide whether a PSB test supports a different outcome.
Are You a Personal Services Business The Four Tests Explained
A medical practice, consultancy or contracting business may invoice through a company, yet the tax analysis still starts with the individual's work. A personal services business (PSB) can self-assess by passing the results test, or by passing one of the other tests and the 80% rule. The other pathways are the unrelated clients test, employment test and business premises test. The ATO outlines the PSB tests here.
Treat the tests as different questions about the contract. A defined project with an agreed outcome may support the results test. Publicly offered services to unrelated clients point towards the unrelated clients test. Employees performing the main income-producing work may support the employment test, while dedicated operating premises may support the business premises test.
Mixed contracts need care. A contract can contain both personal labour and a product, licence or other deliverable. Classify the income and examine what the client is paying for before selecting a test. The entity's label does not decide the outcome.
The results test
For at least 75% of PSI earned, all three conditions must be met:
- Specific result: Payment is for producing a specific result.
- Your equipment: You provide the required equipment or tools.
- Rectification risk: You correct defects at your own cost.
The ATO's results test guidance should be applied to the agreement and work pattern. Hourly billing, a regular roster or open-ended availability may make the test harder to satisfy, depending on the facts. A signed contract helps, but invoices, correspondence and evidence of who carried the commercial risk also matter.
The other three tests
The unrelated clients test asks whether services were provided to unrelated clients after being publicly offered. The employment test examines whether other individuals performed the principal work generating the PSI. The business premises test considers whether the business maintained and used premises separate from the individual's home and the client's premises.
Use the comparison below to identify the evidence needed for self-assessment.
| PSB Test | Core Requirement | Needs 80% Rule Pass |
|---|---|---|
| Results test | Paid for a specific result, supplies required tools, and rectifies mistakes at own cost | No |
| Unrelated clients test | Services provided to unrelated clients through public offers | Yes |
| Employment test | Other individuals perform the principal work generating the PSI | Yes |
| Business premises test | Business premises are maintained and used separately from home or client premises | Yes |
For a closer explanation of the first pathway, read the results test for personal services income. Keep the assessment tied to the commercial substance, then retain documents showing how each condition was considered.
What Happens to Your Tax When PSI Rules Apply
When the PSI rules apply, the tax result may move away from the entity that received the invoice and towards the individual whose personal efforts generated the income. The ATO's approach is designed to prevent income splitting and arrangements that alienate personal services income from the person who performed the work.
Taxation Ruling TR 2022/3 was finalised on 23 November 2022 and applies retrospectively to income years before and after that date. The ruling confirms that PSI is limited to income mainly generated by an individual's personal effort or skill, and that only individuals can have PSI even if the income is received through a company, trust or partnership. A technical summary of the ruling is available here.
Attribution changes the filing picture
A sole trader generally deals with PSI in the individual return. When a company, partnership or trust receives the income, the entity may have attributed PSI reporting obligations and the individual may need to disclose the attributed amount in a different part of the return. The ATO's 2026 attributed PSI instructions distinguish attributed PSI reporting from sole-trader reporting.
The instructions say sole traders shouldn't complete the attributed PSI question. That distinction matters for small professional firms and new migrants who may establish an entity before understanding how the income must flow through the tax returns.
Deductions and distributions require discipline
Where PSI rules apply, deductions may be restricted to expenses directly related to earning that PSI. The entity may also be unable to distribute the relevant income to family members because they hold an interest in the entity. A company structure can still have legitimate commercial functions, but it doesn't automatically create freedom to split income.
If a PSB outcome is available, the consequences may differ, but the supporting tests and reporting still need to be considered. An entity should reconcile its accounts, payments, salary or other allocations with the individual return and relevant forms.
For a practical discussion of this flow, review attributed personal services income. The right treatment depends on the contracts, the entity, the person performing the work and the evidence retained.
Australian Worked Example With Castle Medical GP Partnership
Castle Medical GP Partnership operates in Sydney, where Dr Anya Sharma works from its Castle Hill practice. She invoices the partnership through a company for a monthly clinical retainer of $18,000, then separately supplies educational material and licensing rights for $7,000. These figures illustrate the analysis, rather than setting a benchmark or predicting a tax result.
The first decision is to examine the contracts and invoices separately. The retainer appears to pay for Dr Sharma's diagnosis, consultations and clinical judgement. The educational package could also draw on her expertise, yet its drafting, repeat use, licensing rights and independent deliverables may give it a different character.
The ATO applies the PSI test by contract. Where more than 50% of a contract's income rewards personal efforts or skills, the entire amount under that contract is PSI. Where 50% or less relates to those efforts or skills, none of that contract income is PSI. The ATO's myTax instructions discuss this contract treatment.
A mixed contract therefore needs more than a convenient invoice description. Dr Sharma should record what each payment covers, how the price was determined, whether the materials can be supplied without her continuing personal involvement, and who must correct errors. A written allocation between clinical services and reusable deliverables can make the commercial substance easier to assess.
She should also review client concentration. If Castle Medical and its associates provide 80% or more of her PSI, the rules may apply unless she can rely on the results test. That test may be relevant if she can show the work was paid for specific results, she supplied the required tools, and she corrected mistakes at her own cost for the required portion of PSI.
If the rules apply, income received by Dr Sharma's company may need attribution and disclosure through both entity and individual reporting. Before changing contracts, invoices or distributions, medical professionals may benefit from accounting support for medical professionals suited to these arrangements.
Structuring Compliance and Practical Planning Tips That Keep You Safe
A compliant structure begins with evidence gathered as the work happens. Keep the signed contract, scope of work, pricing schedule, invoices, client correspondence and records showing who supplied equipment, carried commercial risk and corrected defects. For a recurring retainer, preserve the service descriptions and separate personal attendance or judgement from products that could be reused without your continuing involvement.
A mixed labour-plus-product contract needs closer attention than a single invoice label. A written schedule could identify clinical services, software or content licences, project deliverables and post-delivery obligations. It should also explain how the price was set, who owns or supplies the materials, and who must fix an error. That document will not decide the tax treatment by itself, but it can show the commercial substance more clearly.
Treat entity reporting as a separate workstream
A company, partnership or trust may receive PSI, yet the individual who generated the income remains central to the analysis. Reconcile the entity's accounts with the individual's attributed PSI information. Check that the correct questions and supplementary business items have been completed. Sole traders should not complete the attributed PSI question in the individual return.
Entity attribution is often where an otherwise careful arrangement becomes difficult to defend. Keep a contract-by-contract schedule showing the relevant individual, the client, the income received and the amount attributed or disclosed. Compare that schedule with invoices, bookkeeping records and distributions before lodging returns. A mismatch may indicate a reporting problem rather than a change in the underlying character of the income.
The ATO has announced that, for PSI reviews beginning between 28 November 2025 and 30 June 2027, it does not intend to consider applying Part IVA where the taxpayer can show a genuine attempt to move an alienation arrangement to low risk. This should be treated as a forward-looking compliance approach, not as a general exemption or a substitute for checking the current return instructions.
A transition should be documented as it occurs. Keep evidence of the commercial reasons for the change, reasonable remuneration for work performed, any working-capital reasons for retaining profits, and the way the revised arrangement was implemented. Retrospectively rearranging income would not provide the same record of genuine commercial conduct.
A personal services entity can self-assess as a PSB through the results test, or through another PSB test together with the 80% rule. The assessment should be completed each year and supported by documents showing the relevant contracts, client mix, equipment, rectification obligations and business practices. Personal services business determination support can help organise that review.
The practical decision flow is straightforward. First, identify which contract income is PSI. Next, test whether the entity qualifies as a PSB. Then confirm attribution, return disclosures and supporting records. Mixed deliverables and entity reporting should be reviewed separately, because a sound conclusion on one does not automatically resolve the other.
PSI usually turns on the substance of the contract, not the entity receiving payment. The appropriate response depends on the arrangement, including mixed deliverables, client concentration, PSB eligibility, attribution and reporting evidence.
A sound structure makes the underlying work easier to see, test and report.
Frequently asked questions
Can PSI be earned through a company?
Yes. PSI can be received indirectly through a company, partnership or trust acting as a personal services entity. The fact that the entity invoices the client does not prevent the income from being PSI. The relevant individual is the person whose personal skills or efforts mainly generated the income under the contract.
Does the 50% rule apply to the whole business?
The rule is applied to the income under each contract. If more than 50% of a contract's income rewards personal labour, skills or expertise, the entire amount from that contract is treated as PSI. If personal efforts account for 50% or less, none of that contract income is PSI.
What does the 80% rule mean?
If 80% or more of your PSI comes from one client and that client's associates, you do not meet the 80% rule and the PSI rules apply. If less than 80% comes from that client group, you may self-assess as a PSB only if you also satisfy another PSB test.
Can a contractor pass the results test?
A contractor must satisfy all three results-test conditions for at least 75% of PSI earned. The contractor must be paid to produce a specific result, provide required equipment or tools, and fix mistakes at their own cost. The written contract and actual conduct should support each condition.
How is PSI reported when an entity receives it?
Reporting can differ between sole-trader PSI and attributed PSI received through an entity. The individual and entity may have separate disclosure responsibilities. Check the current return instructions, particularly where a company, partnership or trust receives the fees.
If you would like clarity on how these principles may apply to your circumstances, contact Everglow on 1300 913 929 or email contact@everglow.au.
To book directly: Book a meeting with Panbo.
Tags: personal services income, ATO tax rules, personal services business, contractor tax, medical professional tax, attributed PSI, Australian tax compliance, professional services structures
Want help applying this to your situation?
Every situation is different. Book a time with our team to talk it through, or call us on 1300 913 929.