PSI (Personal Services Income) Rules Assessment

What makes income PSI

PSI is income that is mainly a reward for your own personal efforts or skills. It is a question about the character of the income, not about the entity that receives it. A company or trust can receive PSI, and when it does the rules follow the income rather than the structure.

The classic test is whether the income is earned mainly by personal exertion rather than from selling goods, using substantial income-producing assets, or from a business that employs others to do the work. For a practitioner who personally sees the patients, the answer is usually yes.

The four tests, and what each requires

If the income is PSI, you are only free of the restrictions if you are a Personal Services Business. You are a PSB if you pass any one of four tests, so a single pass is enough and there is no need to satisfy the others.

The results test is the one most practitioners pass. It requires all three of: being paid to produce a specific result, providing your own equipment, and being responsible for fixing your own mistakes at your own cost. All three must hold, which is why it is common in genuinely independent contracting and rare in an arrangement that is employment in substance.

The unrelated clients test requires services provided to two or more unrelated clients, obtained through direct outreach such as advertising or a public offer. Two clients alone is not enough; the work has to have been won from the public rather than handed over by one source.

The employment test requires the business to employ others who do at least 20% of the principal work. A practice nurse doing administrative work does not count; the test is about who performs the principal work itself.

The business premises test requires premises used exclusively for business, physically separate from any private residence, and used with clients. Rooms inside your home fail it even if they are used only for work.

What happens when PSI applies

If you are not a PSB, the PSI rules apply. Your income is attributed to you personally, regardless of what entity invoices it, and you cannot split it with associates such as a spouse or a family trust.

Deductions are limited as well. You cannot claim rent, mortgage interest or rates for premises you occupy as a residence, and you cannot claim payments to associates for non-principal work. Superannuation contributions for associates doing non-principal work are also disallowed. The effect is that the structure costs money to run without delivering the tax benefit it was set up for.

The 80% rule

There is a further restriction on how you can self-assess. Where 80% or more of your PSI comes from a single client and their associates, the unrelated clients test and the business premises test cannot be used to self-assess as a PSB.

The results test and the employment test are unaffected, so a practitioner in that position needs to pass one of those two, or apply to the ATO for a determination. A single-client contractor who would otherwise rely on the business premises test is the case the rule was written for.

What this calculator does not model

This calculator applies the four tests as they are written. It does not apply the 80% rule, so a result that turns on the unrelated clients test or the business premises test should be checked against the 80% threshold before it is relied on.

It also does not apply the ATO determination process, which is the route available where you do not pass a test but consider the rules should not apply. A determination is a separate application, not something a calculator can produce.

Why medical practitioners are frequently caught

A GP or specialist operating through a service entity or family trust is a classic PSI scenario. The practitioner personally delivers the services, the income is mainly for their skills, and there are often no employees doing principal work. That combination fails three of the four tests before the 80% rule is even considered.

If this describes your structure, review it with an adviser who understands both the PSI rules and the medical practice context. The question is worth asking before the structure is set up rather than after, because unwinding it later is more expensive than getting it right at the start.