A Sydney-based consultant can spend the year delivering valuable work through a company, then discover that the Australian Taxation Office (ATO) views the income as personal services income (PSI) rather than ordinary business income. The important decision is whether the engagement pays for an outcome, uses the consultant's own business inputs, and leaves the consultant responsible for correcting defects. If at least 75% of relevant PSI satisfies all three parts of the personal services income results test, the PSI rules generally don't apply to that income for the year, subject to the statutory requirements in section 87.18 of the Income Tax Assessment Act 1997.
Who this article is for: Australian consultants, contractors, professionals and small business owners who earn income mainly from their personal skills or effort, particularly where one client supplies most of the income.
Currency note: This article reflects Australian rules, thresholds and regulator guidance current as at 08/2026.
When the PSI Rules Stop Applying to Your Contracting Income
Dr Anya Sharma is a fictional example used to show how the rules work. She is not an Everglow client.
Dr Anya Sharma, a Sydney management consultant, opens an ATO review letter after a routine check of her contracting arrangements. Her company received the invoices, but Anya performed the core work herself. The question isn't whether she used a company. It's whether the income is mainly a reward for her personal effort or skill, and whether her company can demonstrate that the work was conducted as a genuine business.
Personal services income describes income that is mainly generated by an individual's personal skills or effort. It can arise when a person contracts directly as a sole trader or works through a company, trust or partnership. The legal structure doesn't, by itself, decide whether the income is PSI.
The personal services business (PSB) framework is the gateway to determining whether the PSI rules apply. The ATO identifies the results test as one of four PSB tests. Passing the results test for at least 75% of relevant PSI can switch off the PSI rules for the income that meets the test in that income year, as explained in the ATO results test guidance.
That distinction matters because the PSI rules can attribute income back to the individual who performed the services and restrict deductions that might otherwise be available to an ordinary business. A consultant with a single dominant client may find that the results test is the only practical self-assessment pathway, because the other PSB tests are affected by the separate 80% concentration rule.
Practical rule: A fixed-price contract can support a results test position, but the invoice label alone won't establish that the arrangement is genuinely outcome based.
A useful way to compare how technology businesses present their services and external engagements is through a directory listing for Global App Testing. It isn't a substitute for tax analysis, but it can help a consultant think more clearly about the difference between delivering a defined business outcome and supplying labour.
For a plain-language introduction to the wider regime, see Everglow's personal services income guide.
The Three Conditions Behind the Results Test
The personal services income results test has three cumulative conditions. A contractor must satisfy all three for the relevant income. Meeting one or two conditions isn't enough.
Payment must be for a result
The first condition asks what the client is paying for. A genuine results-based arrangement pays principally for producing a specified outcome, rather than for the hours, effort or general availability of the worker.
For example, a consultant might agree to design and implement a defined reporting system for a fixed fee. The contract would ordinarily describe the deliverables, acceptance requirements and payment terms. An arrangement that pays an hourly or daily rate for the consultant's time is less consistent with this condition, even if the parties describe the worker as an independent contractor.
The commercial substance matters more than the heading on the agreement. A “project fee” that is calculated by multiplying hours by an hourly rate may still need careful review.
The worker must supply the necessary tools
The second condition concerns plant, equipment or tools. The individual must supply, or be required to supply, the items needed to produce the contracted result.
That might include specialist equipment, a licensed analytics platform, testing tools or other business resources, depending on the engagement. A contractor who uses only a client's systems and equipment may have difficulty establishing this limb where those resources are necessary to produce the result.
The test doesn't mean every item must come from the contractor. The question is whether the contractor supplies the necessary business inputs required for the work, viewed in the context of the particular result.
The worker must carry defect liability
The third condition requires the individual to be liable to fix defects in the work at their own cost. This is more than agreeing to answer questions after delivery. It involves a genuine obligation to remedy substandard work without charging the client again for the correction.
A written defect or rectification clause can provide useful evidence, particularly where it identifies the work covered, the correction process and who bears the cost. The clause should reflect the parties' actual conduct. A term that exists only on paper may not carry much weight if the client bears all remediation costs in practice.
The ATO guidance confirms that the three conditions must be met for at least 75% of the relevant PSI in the income year. The threshold is embedded in section 87.18, rather than being a mere administrative preference. Everglow's personal services business explanation provides related context on how the PSB framework operates.
How the Results Test Sits Beside the Other PSB Tests
The results test sits beside three alternative PSB tests. The order of analysis matters because the 80% rule applies to the alternatives, not to the results test itself.
The unrelated clients test focuses on whether the consultant obtains work from at least two unrelated clients through offers or invitations to the public. It may suit a freelancer with a varied client base and visible business marketing.
The employment test looks at whether the business engages another individual or entity to perform a meaningful part of the principal work. Administrative assistance alone may not establish this pathway because the relevant work needs to relate to the income-producing service.
The business premises test requires the taxpayer to maintain and use premises throughout the income year. The ATO says those premises must be used mainly to gain PSI, used exclusively by the taxpayer, and physically separate from private premises and the client's premises. A home office generally won't meet those specific requirements.
The ATO's self-assessment guidance for personal services businesses explains how these pathways fit together.
| Test | Key condition | Gating threshold | Best suited to |
|---|---|---|---|
| Results test | Payment for a result, own necessary tools, and defect liability | No separate 80% gate | Outcome-priced work, including work for one dominant client |
| Unrelated clients test | Work from at least two unrelated clients through public offers | Less than 80% from one client and associates | Consultants with a varied client base |
| Employment test | Another worker performs a meaningful part of the principal work | Less than 80% from one client and associates | Businesses that genuinely delegate core work |
| Business premises test | Separate premises used mainly and exclusively for PSI activities | Less than 80% from one client and associates | Practices operating from dedicated business premises |
A consultant whose PSI is concentrated with one client may therefore have only the results test available for self-assessment. The 80% rule isn't part of the results test, but it can prevent reliance on the three alternatives. A closer review of personal services business determination options may be appropriate where no test is clearly satisfied.
A Sydney Consultant Worked Through the 75% Calculation
Dr Anya Sharma operates as a sole trader in Sydney and provides management consulting services to one corporate client. During the income year, she receives five payments for separate deliverables. The arrangement may produce PSI because the value of the work is principally Anya's expertise and effort.
The contract file shows that three deliverables are priced by outcome. Anya uses her own licensed analytics platform and other necessary tools, and each agreement requires her to remedy defects within 14 days at her own cost. Those three engagements total $103,000.
Two other deliverables are priced on a time-and-materials basis. They total $32,500 and don't satisfy all three conditions. The client's total PSI for the year is therefore $135,500.
| Deliverable | Contract type | Value (AUD) | Three conditions met? | Cumulative PSI |
|---|---|---|---|---|
| Strategic operating model | Outcome priced | $44,000 | Yes | $44,000 |
| Data and reporting framework | Outcome priced | $31,000 | Yes | $75,000 |
| Implementation review | Outcome priced | $28,000 | Yes | $103,000 |
| Advisory support | Time and materials | $19,000 | No | $122,000 |
| Additional project assistance | Time and materials | $13,500 | No | $135,500 |
Anya's satisfying income is $103,000, out of total PSI of $135,500. That is roughly 76%, which clears the 75% threshold by a narrow margin. On the stated facts, and assuming the contracts and conduct support the analysis, the results test may be met for the year.
The calculation should be performed against the relevant PSI for the income year, not by counting contracts or averaging the number of successful engagements. A high-value outcome-based contract can carry more weight than several smaller hourly assignments.
Anya should retain the signed agreements, invoices, platform records and defect correspondence. Everglow's guide to attributed personal services income can help frame the consequences if the calculation produces a different result.
What It Means If Your Personal Services Income Fails the Test
If the 75% threshold isn't met and no alternative PSB pathway applies, the PSI rules may apply to the relevant income. The outcome differs depending on whether the individual works directly or through a personal services entity, such as a company, trust or partnership.
For an individual contractor, the rules may attribute the net PSI to the individual who performed the services. For a personal services entity, attribution can require the entity to treat the income as belonging to the individual rather than treating retained profits as ordinary business income.
The rules can also restrict deductions. The ATO explains that the PSI regime limits deductions that don't have the same connection to earning the individual's personal services income, including certain business expenses that an employee generally couldn't claim. The 25% deduction restriction is part of the statutory PSI framework, and the precise treatment depends on the type of expense and the entity involved.
The central risk isn't the use of a company or trust. It's assuming that the structure changes the character of income produced mainly by one person.
Personal services entity rules may also create additional reporting and withholding obligations. Losses and deductions can require specific treatment, including rules that may move losses between income years in appropriate circumstances. Those consequences need to be reviewed from the entity's records, contracts and return positions rather than inferred from the fact that a test was missed.
Passing the test can provide a cleaner treatment because the PSI attribution rules don't apply to the qualifying income for that year. It doesn't remove the need for accurate bookkeeping, proper substantiation or broader anti-avoidance considerations. For a general explanation of the income category, see what personal services income means in Australia.
Practical Compliance Steps Before You Sign or Lodge
A results test position is easier to defend when the contract, invoices and working papers tell the same story. Review the engagement before signing, not after an ATO query arrives.
Read the payment clause: Identify whether the client pays for a defined result or for time, availability and effort. A fixed amount isn't conclusive if the amount is really based on hours worked.
List the necessary tools: Record the plant, equipment, software and other tools required for delivery. Note which items you supply and which items the client supplies.
Confirm defect responsibility: Check whether you carry the cost of correcting defects. Keep written evidence of any rectification obligation and how the parties apply it.
Allocate the PSI: Match each invoice and payment to the relevant client, contract or deliverable. This makes the income-year calculation traceable.
Run the threshold calculation: Add the PSI connected with engagements satisfying all three conditions, then compare it with total relevant PSI for the year.
Retain supporting records: Keep contracts, statements of work, invoices, emails, acceptance records and correspondence about corrections. These documents should show what was agreed and what happened.
Review the entity: If a company, trust or partnership receives the income, check whether personal services entity reporting, attribution or withholding obligations may arise.
If the wording is ambiguous, obtain advice before relying on the result. Everglow Prosperity is one option for a structured review of PSI contracts, entity records and tax treatment, alongside your existing accountant or legal adviser where appropriate.
Bringing It Together and What to Do Next
The personal services income results test can be the practical route to PSB treatment when the unrelated clients, employment premises and business premises tests aren't available. The relevant income must satisfy all three conditions, payment for a result, supply of necessary plant, equipment or tools, and liability to fix defects, for at least 75% of the relevant PSI in the income year under section 87.18.
The right conclusion depends on the contract wording, payment structure, tools used, defect risk and actual conduct. Failing the test doesn't automatically mean an audit, but it may mean that PSI is attributed to the individual and that deductions are restricted under the applicable rules.
The core answer is simple, but the evidence is specific. Passing requires all three conditions, applied to the relevant proportion of PSI, and the correct approach depends on your circumstances.
If you would like clarity on how these principles may apply to your own circumstances, contact Everglow on 1300 913 929 or email contact@everglow.au.
To book directly: Book a meeting with Panbo.
Tags: personal services income, PSI results test, personal services business, Australian tax, contractor tax, ATO compliance, consulting business
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