Personal Services Income vs Business Income 2026–27

By Panbo Ye, CFP^®, FCPA, SMSF Specialist Advisor · Founder of Everglow · Updated 1 November 2026

Written for Business Owners

An IT contractor registers a company, gets an ABN and invoices a single client. Tidy paperwork, yet none of it settles the personal services income (PSI) question.

Under the ATO instructions on PSI, if more than 50 percent of a contract payment rewards one person's labour or skill, the whole contract is personal services income. The work decides the character of the income, contract by contract, and the structure you chose to receive it does not change that.

Personal Services Income vs Business Income at a Glance

A Chatswood GP contractor invoices a medical centre through her company and assumes she is running an ordinary business. That assumption is worth testing before she lodges. Personal services income (PSI) is income that is mainly a reward for one individual's efforts or skills. Business income can come from goods, assets, intellectual property or other people's work. Which side an engagement lands on decides the tax treatment that follows.

The Australian Taxation Office (ATO) is the federal tax administrator. A personal services business (PSB) is an arrangement that passes specific tests so the PSI rules don't apply to that income. According to the ATO business and professional items schedule instructions on PSI, PSI is income that is mainly a reward for an individual's personal efforts or skills, and if more than 50% of a contract payment relates to labour, expertise or personal capability, the entire amount under that contract is PSI.

The comparison in one table

The sequence matters. Classify each contract under the 50% rule first, because the result is all or nothing. Only the contracts that land as PSI move on to the personal services business tests, which apply per individual rather than per entity. An ABN, company or trust shows how you are structured; it says nothing about what the income is.

When personal efforts account for 50% or less, none of that contract income is PSI. The ATO also excludes investment income, income from selling goods, income from using income-producing assets, and salary received as an employee when applying the PSI tests. Doctors, consultants, engineers and IT contractors therefore check what the work produces before they weigh the structure around it.

Who this article is for: contractors, doctors, IT specialists and SME owners lodging 2025–26 returns during 2026–27, especially if you chose an entity before checking the work.

Currency note: This article reflects Australian rules and thresholds for the 2026–27 income year, current as at 10/2026.

The Contract Test That Classifies Mixed Engagements

You don't apportion only the labour slice of a mixed job. You classify each contract as a whole, then only the PSI contracts enter the later tests.

The ATO myTax instructions on personal services income state that if more than 50% of income under a contract is for the individual's personal efforts or skills, all income from that contract is PSI, and if 50% or less is personal-effort income, none of it is PSI. It's all or nothing, which surprises people who expect a neat split.

Three patterns that land differently

Say a medical consultant's fee is almost entirely her own clinical work. Her company employs a receptionist and owns basic equipment, but that doesn't change the majority. The whole contract may be PSI.

An engineer may charge mainly for a licensed design or a substantial asset that produces the result, with personal time at or under half the value. On those facts, none of that contract may be PSI. A trade business may sell materials and use employees for most of a job, so the principal's labour isn't the majority of that contract either. Several contracts in one year can fall on different sides, which is why labels on invoices aren't enough. For a useful reminder that worker labels can carry costs beyond the invoice, Bookkeeping and Accounting of Florida's payroll guidance is a plain overseas illustration, though Australian PSI law is what governs here.

Practical rule: Keep a simple contract register with the client, what was supplied, your estimated share of personal effort, and whether the amount enters the PSI pool.

The ATO myTax and business and professional items instructions follow that filing workflow. Only your PSI pool then goes into the results and 80 percent tests.

Results and 80 Percent Tests for a PSB

The results test asks whether the contract pays for a finished outcome. The ATO content on the PSI percentage thresholds states a taxpayer can generally self-assess PSB status by satisfying the results test for at least 75% of the individual's PSI. The test is cumulative: all three elements must be met. You need to be paid to achieve a specified result, supply the tools or equipment needed where required, and fix defective work at your own cost.

Test each individual separately

Where a company, partnership or trust has several people earning PSI, the test runs separately for each individual. A company, trust or ABN is not proof of business income on its own; the tests ask about each person's contracts and client mix. One doctor in a practice may pass while another doesn't, because their arrangements differ, and entity turnover can hide that gap.

I would build the working papers by person from the start, even if the bank account is shared. It shows early if one individual's roster work is dragging the whole plan, and it saves a painful rebuild at lodgement.

If the results test isn't met, the 80 percent gateway comes next. The ATO guidance on self-assessing as a PSB states that if 80% or more of an individual's PSI comes from one client and its associates, the individual generally cannot self-assess the unrelated clients, employment or business premises tests, and the PSI rules apply unless a Commissioner's determination is obtained.

The calculation uses PSI only. It excludes investment income, income from selling goods, income from using income-producing assets and employee income. Associates and related entities count alongside the main client, so two invoices to companies in the same group may still be one source. A determination is something you request from the Commissioner; it does not arrive automatically because the work feels commercial.

Worked concentration numbers

An individual earning $160,000 of PSI from one hospital group and $40,000 from unrelated clinics sits at exactly 80 percent from one source, so the alternative tests generally can't be self-assessed. At $150,000 and $50,000, the share is 75 percent, and those tests may be considered. A $10,000 shift between the two sources changes the answer, which is why a client-concentration record by individual, updated before 30 June, is more useful than a surprise in October.

Where the share sits below 80 percent, one of three alternative tests needs to be met for the income at issue. The unrelated clients test needs PSI from at least two unrelated clients, won through offers to the public or a section of the public, such as advertising or public tendering. Private referrals alone may not be enough, and related clients do not become unrelated because they hold different ABNs. The employment test needs others, such as employees or an apprentice, to do the principal work. The business premises test needs premises used mainly for the work, with exclusive use, rather than mainly a home or the client's site.

Our detailed guide to the personal services income results test works through the evidence for that first pathway in more detail.

Diversifying revenue alone is not sufficient if the work remains personal labour without documented commercial independence. Match the evidence to the test you rely on. A results-test file generally holds the contract or quote showing a fixed result, the rectification clause and records of the tools or equipment supplied. An unrelated-clients file holds the advertisements, directory listings or tender submissions that won the work. An employment file holds rosters and agreements showing who did the principal work, and a premises file holds the lease and floor plan showing exclusive use. If the paper says you're paid by the hour and the client fixes mistakes, don't expect the results test to rescue the arrangement.

Tax, Super, GST and Entity Effects Compared

Once each contract has passed or failed the 50 percent rule and the PSB tests have run per individual, the consequences split sharply: who is assessed, which deductions survive, and whether super and GST obligations move.

If the PSI rules apply, income received by a company, partnership or trust is generally attributed to the individual, unless the entity conducts a PSB or pays the individual a prompt, commercial salary. The cash and the tax bill can sit with different taxpayers. A prompt salary creates PAYG withholding and possible super consequences, while leaving the income in the entity risks attribution anyway, so the route the money takes matters as much as the label on it.

Attributed PSI is assessed to the individual at 2026–27 resident tax rates: nil to $18,200, 15 percent from $18,201 to $45,000, 30 percent to $135,000, 37 percent to $190,000, and 45 percent above $190,000, plus the 2 percent Medicare levy. Deductions that are mainly private, or that don't fit the PSI deduction rules, can be limited. A PSB may claim ordinary business deductions, but ordinary still means substantiated and connected to earning income.

Super guarantee and GST registration

Goods and services tax (GST) registration turns on whether you carry on an enterprise and meet the registration rules; the PSI label never decides it. Check the current registration threshold on ato.gov.au, and see our guide to the GST threshold in Australia for the registration decision. The super guarantee is 12 percent in 2026–27, and from 1 July 2026 Payday Super means employers pay it with each pay cycle rather than quarterly. Contractor status alone doesn't remove super obligations; some engagements still create them. If you're planning deductible contributions, the 2026–27 concessional cap is $32,500.

Reporting may include the individual return and the business and professional items schedule. Entity choice still matters for asset protection and non-PSI income; it just can't retain PSI by itself. Our firm advises contractors and professionals on the PSI rules, and our specialist services for doctors, lawyers, IT contractors and other PSI earners cover tax and financial planning plus income protection and wealth structuring. We work in English and Chinese.

How the Rules Land on Doctors Tradies and Practices

A GP contractor and a plumber can both invoice through companies and land on opposite sides of the line, because their contracts produce returns in different ways. What settles personal services income vs business income is the contract first, then the individual's tests. The company structure is the wrapper, not the answer.

In practice I often see GP contractors and new migrant professionals set up the company first, then ask about income character when the first return falls due. The entity feels like the business, so it's an understandable order. The calmer order is contract first, entity second: apply the all-or-nothing 50 percent personal-work test to each contract, then run the personal services business tests per individual.

A fictional worked example for 2026–27

Dr Anya Sharma, a Chatswood GP contractor, receives $220,000 in 2026–27 through her company from one medical centre and its associates, plus $20,000 from unrelated locum shifts. Every clinical contract is her own hands on the roster, so more than 50 percent of each one is her personal work and the income is PSI. About 92 percent of it comes from a single source. On these facts the results test is not met, because she's paid for time rather than a specified result she would have to rectify at her own cost, and this client mix gives her no path through the remaining tests. The PSI rules apply: the company pays her a prompt, commercial salary or attributes the income to her, and holding profit at a company rate doesn't produce the saving the structure suggested.

Tom, a Penrith tradie, sits on the other side. Most of his company's revenue comes from fixed-price residential jobs where materials and an employee's labour exceed half of each contract price, so those contracts are business income under the 50 percent rule. The remainder is labour-only days for builders, which is PSI because his own effort produces the return. He wins that work through public advertising across several unrelated builders, so the unrelated clients test is satisfied and nothing is attributed to him personally. The marketing trail doubles as evidence that he made offers to the public, and practical resources such as Google Ads campaigns for trade businesses are one way a tradie builds that pipeline, though advertising alone doesn't settle PSI.

A three-doctor Castle Hill practice shows why the tests run per individual rather than per entity. Each doctor's client mix is assessed on its own: a partner who also consults at two unrelated clinics can land differently from one who works only at the practice. Worker status is a separate question again, and our guide on contractor vs employee in Australia covers that distinction.

Contracting is common enough that this classification is worth getting right early. The ABS Working Arrangements release recorded 1.1 million independent contractors in August 2025, equal to 7.6% of all employed people. With arrangements that widespread, the recurring problem is a cash-flow mismatch: the entity banks the fee while the individual bears the tax, so PAYG instalments, finance applications and retained-profit plans can pull in different directions. PSI is a classification of where the return comes from. Naming it early lets salary, super and drawings line up with the assessment.

Choose the Treatment Before You Lodge

The contract leads; the entity follows.

Lodgement is the point of no return for this year's treatment, so the decisions happen before it. Three matter most: the salary the entity pays the individual, the way PAYG instalments are funded, and what your records say about each contract.

Where the entity must pay the individual, a prompt, commercial salary is generally cleaner than planning to retain PSI at a company rate. A salary settled too late can also split the outcome, leaving the entity's deduction and the individual's income in different years. For a genuine mixed business, keep non-PSI contracts separate in your register so loose coding doesn't pull them into the PSI pool. And where no PSB test can be self-assessed, a personal services business determination request may still be available, though it carries its own evidence requirements and lead time.

Then sort the cash flow. Match PAYG instalments to the salary the individual will draw, and put a small monthly transfer into a separate tax account. That habit can prevent a large personal bill arriving after the company has spent the money.

One concrete step before lodgement

Bring the full file to a review with a registered tax agent before you lodge: the contract register coded per contract, client concentration worked out per individual, the contracts and invoices behind each engagement, and records of salary paid, super and BAS positions.

That's the material we work through in our business advisory and tax planning service, which provides the numbers, a tax review and clear actions, and our personal tax returns service follows 8 steps including a senior review and a financial wellbeing check. Catching a mismatch at the review table beats reading about it in an ATO letter, so book it while there's still time to fix whatever it finds.

Questions Contractors Still Ask

Does having an ABN or a company make my income business income

Generally no. The nature of the work decides whether income is PSI, so apply the 50 percent rule to each contract first: where more than half of what you are paid rewards your personal skills, knowledge or efforts, that income keeps its PSI character inside a sole trader account, a company or a trust. An entity may still suit asset protection or non-PSI income, depending on your circumstances. Where a structure employs several people, the PSB tests then apply to each individual's own income, so one person's result does not carry across the whole practice.

Can I claim a home office when my income is PSI

A home generally doesn't meet the business premises test, which looks for premises used mainly for the work and held for your exclusive use. Whether any home office deduction is available then depends on the facts and on the PSI deduction rules, and two contractors doing similar work can land on different answers. Our guide to PSI tax deductions is a useful starting point, and a registered tax agent should check your records before you claim.

Does PSI mean no GST

No. GST depends on carrying on an enterprise and on registration, and the PSI label has no bearing on either question. A PSI contractor may still need an ABN, GST registration and business activity statements, while another contractor may not, so the practical check is what your activities look like. Check the current threshold and your enterprise activities on ato.gov.au before you invoice, because backdating registration can create avoidable cash-flow pressure.

What if I only learned about PSI after lodging

Your return may be amendable, depending on timing and the type of error. Gather contracts, invoices, payment records and any salary evidence first, then ask a registered tax agent to check whether an amendment, voluntary disclosure or determination request may be appropriate. Acting early generally gives you more options than waiting for the ATO to ask, and it keeps the correction in your hands.

The document that decides most of these answers is the contract itself. Pull the current contract for each engagement, plus the matching invoices, before you speak with a registered tax agent, so the classification rests on the paperwork.

Reviewed in the professional context of Everglow Accounting Pty Ltd. Liability limited by a scheme approved under Professional Standards Legislation.

If you would like clarity on how these principles may apply to your own circumstances, you can book a meeting with Panbo.

WordPress tags: personal services income, personal services business, business income, contractor tax, sole trader, Australian tax 2026–27