• 26 March, 2024

“Personal Services Income (PSI) in Australia: Tax Rules, Deductions & Compliance Guide”

Personal Services Income (PSI) is income you earn primarily from your personal efforts, skills, or expertise. It is not just about working as an employee; PSI can apply to sole traders, contractors, partnerships, companies, and trusts if the income is mainly generated through your personal work. PSI rules are outlined under Division 86 of the Income Tax Assessment Act 1997 (ITAA 1997).

Understanding PSI is crucial for tax compliance and maximising legitimate deductions.

Does PSI Apply Only to Individuals?

No. While commonly associated with freelancers or contractors, PSI rules also cover income earned by companies, trusts, and partnerships if it comes from personal services.

• Employees earning a regular salary are excluded from PSI rules.
• Entities earning PSI must comply with specific attribution rules that assign income to the individual providing the service.

This ensures that PSI rules focus on income derived from personal effort rather than standard business or employment income.

How PSI Impacts Taxation

PSI primarily affects two areas of your tax:

• Restriction on Deductions – You can only claim expenses directly related to earning your PSI. Broad business deductions, like marketing or home office occupancy, are generally limited.
• Compliance Requirements – PSI requires careful reporting and completion of specific tax schedules. Failure to comply can trigger audits or disallowed deductions.

Consulting a PSI tax expert is highly recommended to navigate these rules effectively.

Key Deductions Affected by PSI

Expense Type	Deductible?	Notes
Home Office Expenses	Limited	Only direct work-related expenses; rent/mortgage often restricted
Travel & Transport	Limited	Cannot claim commuting expenses; only work-related travel directly tied to PSI may qualify
Marketing & Advertising	Not deductible	ATO views these as general business costs, not tied to PSI earning
Equipment & Tools	Partially deductible	Depreciation may be restricted; must demonstrate direct use for PSI activities
Training & Education	Limited	Only for maintaining or improving specific skills related to PSI work

Attributed vs Non-Attributed PSI

Attributed PSI

• Applies to individuals in a PAYG setup.
• Taxes are withheld by the employer.
• Deductions are limited, similar to an employment arrangement.

Non-Attributed PSI

• Applies to sole traders, partnerships, companies, and trusts.
• Income is reported and taxed directly by the individual or entity.
• Greater scope for deductions if PSI rules and attribution requirements are met.

Eligibility for Tax Reliefs and Deductions

The Results Test

• Determines if income is paid for achieving a specific result.
• Requires you provide tools, be responsible for mistakes, and deliver outcomes independently.
• Passing allows broader deduction eligibility.

The 80% Rule

• If 80% or more of your PSI comes from one client, deductions are restricted.
• Diversifying clients can help unlock additional deductions.

Other Tests

• Unrelated Clients Test: Shows your services are available to the wider market.
• Employment and Business Premises Tests: Determines if your setup qualifies for deductions beyond standard PSI rules.

Why PSI Matters

Understanding PSI is essential for:

• Compliant tax reporting
• Maximising allowable deductions
• Avoiding audits and penalties

Getting professional guidance ensures you can optimise your tax outcomes while staying fully compliant with ATO requirements.

Final Thoughts

Personal Services Income rules may seem complex, but careful planning and expert advice can help you navigate them successfully. Whether you’re a freelancer, contractor, or operating through a business entity, understanding PSI will save you money and prevent compliance issues.

For professional PSI tax advice and compliance support, contact Workpaper Accounting Services.

🌐 Website: https://workpaper.com.au

📍 Address: 7 Bridge St, Werribee, Victoria 3030, Australia
📞 Phone: 0485 825 915
📧 Email: info@workpaper.com.au