Personal Services Income: What It Is and Why Getting It Wrong Can be a Problem
If you earn income mainly from your own skills or efforts, whether you’re a: consultant, tradie, or contractor, there’s a good chance the ATO considers it Personal Services Income. How you handle it matters more than you might think.
What is Personal Services Income?
Personal Services Income (PSI) is income earned mainly as a reward for your personal efforts and skills, rather than from a business selling goods or using substantial assets. It can apply whether you operate as a sole trader, company, trust, or partnership. If more than 50% of a contract’s value relates to your labour and expertise, it’s likely PSI.
If a client is primarily paying for you, your knowledge or effort, rather than an end product, the income is almost certainly PSI.
The risks of distributing income incorrectly
Many people structure their earnings through a company or trust hoping to split profits with family members or retain income at a lower tax rate. The PSI rules exist to prevent exactly this. Where they apply, the income must be attributed back to the individual who earned it.
Common pitfalls include paying associates inflated wages, leaving profit inside a company to attract the lower corporate rate, and flowing income through a trust to lower-taxed beneficiaries. All of these arrangements can be unwound by the ATO, with back taxes, interest, and penalties to follow.
Contractor income splitting is an active ATO compliance priority. Data matching makes it easier than ever for them to identify arrangements that don’t stack up.
Do the rules apply to you?
Not necessarily. There are several tests: including the results test, unrelated clients test, and employment test, that if passed, mean you qualify as running a genuine personal services business and the income splitting restrictions don’t apply. Getting advice on which tests you meet (or don’t) is the most important first step.
