What you need to know about personal services income (PSI)

Are you a sole trader working as a contractor, consultant or freelancer? Do you offer products or services that are based mainly on your personal skills and labour? If so, the income you receive may be classified as personal services income (PSI).

There are some special rules for the tax treatment of personal services income earned by sole traders that you should be aware of.

What is personal services income (PSI)?

Personal services income (PSI) is income that is mainly earned from your personal skills or efforts as an individual.

If more than 50% of the income received for a contract/invoice was for your labour, skills or expertise, rather than being generated by the use of assets, the sale of goods or by a business structure, then that income received is PSI.

Examples of PSI and non-PSI income

Susan is a management consultant operating as a sole trader. She recently completed contracts for 2 of her clients.

Contract 1: Susan provided a 1-hour training course for a client. She charged $1,000 for her course. This included training materials that cost $100. Since $900 (90% of the contract) is for her skills and expertise, this is PSI. Susan is able to report $1,000 as PSI.

Contract 2: Susan provided management software for a client. She charged $10,000 in total. This included $8,000 to cover the cost of the software licence. Since $2,000 (20% of the contract) is for her skills and expertise, this is not PSI. Susan cannot report PSI for this contract.

Like Susan’s examples above, your taxable income can be a mix of PSI and other income.

Determine if you earn PSI

Use the Personal services income tool (ATO) to work out if you have PSI and if the PSI rules apply.

You can receive PSI even if you’re not a sole trader. If you’re producing PSI through a company, partnership or trust and the PSI rules apply, the income will be treated as your individual income for tax purposes.

There are special tax rules around PSI to improve the integrity and equity of the tax system. 

When the PSI rules apply

If the rules apply, it will affect:

  • The tax deductions you can claim for PSI
  • How you report PSI

All other income you earn follows normal tax rules.

When personal services income (PSI) rules apply, there are limitations for deductions that can be claimed against this income. In general, an individual who earns PSI is treated as though they are in the same position as an employee.

Deductions you cannot claim

When the PSI rules apply, you cannot claim deductions against the PSI for:

Personal services income is also NOT eligible for Small business income tax offset

Deductions you can claim

You can claim deductions against your PSI if an expense occurred earning this income.

For example, you could claim:

  • The cost of gaining work, such as advertising, tenders and quotes
  • Registration and licencing fees
  • Account-keeping fees, including bank fees
  • Some insurance costs, including public liability and professional indemnity insurance fees
  • Salary or wages and super contributions for an employee engaged at arm’s length (not an associate)
  • Reasonable amounts payed to an associate for principal work
  • A portion of home office expenses, such as heating, lighting, phone and internet. Do not claim rent, mortgage interest, rates or land taxes

You may be eligible for other deductions depending on what your business is and your contracts.

When PSI rules do not apply

If the PSI rules don’t apply, your business is a personal services business (PSB). When you’re a PSB, there are no changes to your tax obligations, except that you need to declare any PSI on your tax return.

For further information and expert assistance with your tax, contact our KMT accountants today!

Source: ATO

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or professional advice from a qualified accountant at KMT Partners.