Personal services income (PSI)
Do you offer products or services that are based on your skills and labour?
If so, it’s likely that the income you receive is classified as personal services income (PSI).
For sole traders, understanding how much PSI you earn is important as it can affect what tax deductions you can claim.
What is PSI?
You earn PSI when more than 50% of the income you receive from a contract is for your skills, knowledge, expertise or efforts.
You don’t earn PSI if:
- less than 50% of your income from a contract is for your skills, knowledge, expertise or efforts
- you receive income from selling or supplying finished goods, even if you made these goods
- you receive income from an income-producing asset, such as renting a vehicle or piece of machinery
- your income comes from licencing your intellectual property, such as a patent.
Susan is a management consultant operating as a sole trader. She recently completed contracts for two of her clients.
- Contract 1: Susan provided a 1 hour training course for a client. She charged $1 000 for her course, which included training materials that cost $100. Since $900 (90% of the contract) is for her skills and expertise, this is personal services income. Susan is able to report the $1 000 as PSI.
- Contract 2: Susan was contracted to provide management software for a client. Susan charged $10 000 in total, of which $8 000 covered the cost of the software licence. Since $2 000 (20% of the contract) is for her skills and expertise, this is not personal services income. Susan is unable to report PSI for this contract.
Like Susan in the example above, your taxable income can be a mix of PSI and other income.
- Work out if the income you receive is PSI.
I think I’ve earned PSI, what now?
If you’ve earned PSI, you’ll need to go through the PSI rules to find out what deductions you can claim and what your reporting obligations are.
- Find out if the PSI rules apply to you.
What happens when the PSI rules apply?
When the PSI rules apply, your tax deductions and income tax return obligations will be affected.
Remember, this only applies to income that is PSI. All other income you earn is subject to normal tax rules.
Deductions you can claim
You can claim deductions against your PSI if the expense occurred in earning this income.
Some examples include:
- 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
- the salary/wages and super contributions for an employee, or reasonable amounts payed to an associate for ‘principle work’
- a portion of home office expenses, such as heating, lighting, phone and internet (but not rent, mortgage interest, rates or land taxes).
You may be eligible for other deductions depending on what your business is and how you choose to complete your contracts.
Visit the ATO website for:
Your tax return obligations
When the PSI rules apply to you, you will need to answer some extra questions in your income tax return and in the Business and professional items schedule for individuals. These questions will help ensure you’re claiming your PSI correctly.
- Read about completing your tax return when the PSI rules apply.
What happens when the PSI rules don’t apply?
If the PSI rules don’t apply to you, you have fewer obligations, but will still need to answer a few extra questions in your income tax return. There are no changes to the deductions you can claim.
- Find out about completing your tax return when the PSI rules don’t apply.
- Watch the ATO’s video on Tax basics for small business: Personal services income
- Phone the ATO on 13 28 66 for more information on PSI
- Read about PSI for sole traders
- Read the ATO's Starting your own business topic to help you understand your tax obligations and entitlements.
- For online payments,go to the ATO's Online services page.
- Go to the Australian Business Register to apply for an ABN, GST, PAYG and a business TFN.
- Visit the Inspector-General of Taxation’s Making a complaint page to learn how to make a complaint about tax decisions.